WIVEKSTTY  oi  CALIFORNIA 


THE    AMERICAN 
TRANSPORTATION   QUESTION 


THE  AMERICAN 

TRANSPORTATION 

QUESTION 


BY 

SAMUEL    O.    DUNN 

Editor  of  the  Railway  Age  Gazette  ;  Lecturer  on  Transportation 
AT  Northwestern  University  ;  Member  of  the  Illinois  Bab 


NEW    YORK    AND    LONDON 
D.    APPLETON    AND    COMPANY 

1912 


107889 


Copyright,  1912,  by 
D.    APPLETON    AND   COMPANY 


Piihlishpil   February,  1912 


Printed  in  the  United  States  of  America 


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k    ^  PREFACE 


^       The  transportation    problem  has  three  vitally  im- 

sf"  portant  factors:  rates,  service  and  financial  return. 
Neither  can  be  intelligently  or  equitably  considered 
except  with  reference  to  the  other  two.  The  railway 
has  a  right  to  exact,  and  the  public  to  require,  fair 
and  reasonable  rates;  but  what  are  such  rates  depends 

'Ij  largely  on  the  service  given  for  them  and  on  the  finan- 

^   cial  return  received  by  the  owners  of  the  railway. 
The  public  has  a  right  to  demand  safe,  convenient  and 
adequate  service;  but  how  safe,  convenient  and  ade- 
quate a  railway  can  make  its  service  depends  largely 
I  on  its  financial  return,  and  this  on  what  rates  it  can 
'  charge.     The  owners  of  the  railways  are  legally  en- 
<  I  titled  to  a  "fair  return";  but  this  right  is  not  abso- 

^  lute;  it  is  conditioned  on  what  kind  of  service  is  given 

K  and  at  what  rates. 

yfc  The  fact  that  rates,  service  and  return  are  thus  re- 
lated and  interdependent  is  sometimes  overlooked  or 
disregarded.  I  have  read  articles  and  books  on  the 
"transportation  problem"  dealing  exclusively  with 
rates.  This  is  like  discussing  whether  the  price  of  a 
suit  of  clothes  or  an  automobile  is  reasonable  regard- 
less of  how  good  a  suit  or  automobile  it  is. 

Most  of  the  matter  in  the  following  pages  was  used 


PREFACE 

in  a  series  of  lectures  to  the  students  of  Northwestern 
University  in  April,  1911.  In  these  lectures  I  tried 
to  discuss  rates,  service  and  financial  return,  not  per 
se,  but  with  a  view  to  their  proper,  and  in  the  long: 
run  necessary,  relation.  Only,  I  believe,  when  rail- 
way officers,  regulating  authorities  and  the  people 
consistently  deal  with  them  in  this  way  will  the  trans- 
portation problem  be  satisfactorily  and  beneficially 
solved. 

Until  a  few  years  ago  the  "railway  problem"  was 
regarded  as  chiefly  the  problem  of  suppressing  unfair 
discrimination  by  railways  between  shippers.  This  is 
still  one  of  the  principal  phases  of  the  subject,  and  in 
these  pages  I  have  given  considerable  space  to  it.  But 
the  question  of  unfair  discrimination  has  become  rela- 
tively less  important,  and  more  attention  and  discus- 
sion are  now  being  given  to  the  basis  on  which  rates 
as  a  whole  should  be  made  and  regulated.  Much  con- 
sideration and  discussion  are  also  being  devoted  to  the 
way  in  which  our  railways  are  managed;  to  whether 
they  are  efficiently  operated  and  give  as  good  service 
as  they  should;  and,  if  not,  to  how  the  economy  of 
their  operations  can  be  increased  and  their  service  im- 
proved. I  have  also  given  a  good  deal  of  space  to 
these  matters.  They  have  not  received  as  much  atten- 
tion in  the  past  as  they  have  deserved. 

Until  recently  the  American  people  did  not  believe 
in  much  regulation  of  industry.  They  thought  that 
the  less  government  and  business  had  to  do  with  each 
other  the  better,  in  the  long  run,  it  would  be  for  both. 
In  recent  years  there  has  been  a  remarkable  change  in 
public  sentiment.     This  has  resulted   in  a  great  in- 

vi 


PREFACE 

crease  of  public  regulation,  especially  of  railways  and 
other  public  utilities.  Many  think  that  we  have  gone 
too  far  in  this  direction.  Many  others  think  that  we 
have  not  gone  far  enough.  The  former  class  will,  per- 
haps, regard  some  of  the  views  regarding  regulation 
herein  expressed  as  too  radical.  The  latter  class  will 
consider  them  too  conservative.  In  the  present  state 
of  public  opinion  they  are  more  apt  to  be  criticised  by 
most  people  as  too  conservative  than  as  too  radical. 
But  when  I  compare  them  with  views  that  have  been 
expressed  by  men  who  for  years  have  been  leaders  of 
public  opinion  in  this  country  on  economic,  and  espe- 
cially on  transportation,  subjects,  it  is  hard  for  me  to 
regard  myself  as  too  conservative.  President  A.  T. 
Hadley  of  Yale  University  said  in  an  article  on  "The 
Ethics  of  Corporate  Management, ' '  in  the  North  Amer- 
ican Review  for  January  18,  1907: 

Personally,  I  am  one  of  those  who  look  with  serious  dis- 
trust on  each  extension  of  political  activity.  I  believe  that 
the  interstate  commerce  law  did  more  to  prevent  wise  rail- 
road regulation  than  any  other  event  in  the  history  of  the 
country.  I  think  that  the  courts  would  have  dealt  with  our 
industrial  problems  better  than  they  have  done  if  the  anti- 
trust act  had  never  been  passed.  I  have  gravely  doubted 
the  wisdom  of  some  of  the  more  recent  measures  passed  by 
the  national  government. 

I  do  not  believe  the  time  will  ever  come  again  when 
the  railways  will  not  be  subjected  to  comprehensive 
regulation;  but  I  do  think  that  Dr.  Hadley,  in  the  ar- 
ticle mentioned,  outlined  means  for  bringing  about 
more  satisfactory  relations  between  the  large  corpora- 
tions and  the  public  that  have  much  more  promise  than 

vii 


PREFACE 

great  additional  extensions  of  government  regulation. 
I  refer  to  the  following  sentences  in  the  article: 

But  I  cannot  shut  my  eyes  to  the  fact  that  these  things 
are  what  business  men  must  expect,  unless  business  ethics 
is  somewhat  modified  to  meet  existing  conditions.  Indus- 
trial corporations  grew  up  into  power  because  they  met  the 
needs  of  the  past.  To  stay  in  power  they  must  meet  the 
needs  of  the  present,  and  arrange  their  ethics  accordingly. 
If  they  can  do  it  by  their  own  voluntary  development  of  the 
sense  of  trusteeship,  that  is  the  simplest  and  best  solution. 
But  if  not,  one  of  two  things  will  happen :  vastly  increased 
legal  regulation  or  state  ownership  of  monopolies.  Those 
who  fear  the  effects  of  increased  government  activity  must 
prove  by  their  acceptance  of  ethical  duties  to  the  public 
that  they  are  not  blind  devotees  of  an  industrial  past  which 
has  ceased  to  exist,  but  are  preparing  to  accept  the  heavier 
burdens  and  obligations  which  the  industrial  present  carries 
with  it. 

Dr.  Hadley's  last  sentence  contains  words  of  wis- 
dom which  every  important  corporation  stockholder 
and  officer,  and  especially  every  important  railway 
stockholder  and  officer,  could  profitably  heed.  There 
is  much  more  to  be  hoped  from  an  enlightened  public 
sentiment  which  will  insist  on  corporation  officers  do- 
ing their  duty  to  their  stockholders  and  the  public, 
and  from  corporation  officers  who  will  recognize  the 
fact  that  they  are  in  a  very  real  sense  trustees  for  the 
public  as  well  as  for  their  stockholders,  and  who  will 
act  accordingly,  than  from  regulation  which  shall 
make  public  authorities  practically  the  managers  of 
properties  whose  ownership  continues  to  be  private. 
There  are  wide  differences  of  opinion  as  to  whether 
stale  socialism  is  desirable;  but  there  can  hardly  be 

viii 


PREFACE 

any  difference  of  opinion  among  intelligent  men  re- 
garding the  proposition  that  public  management  of 
properties  which  are  privately  owned  would  lead  to  in- 
tolerable conditions,  simply  because  it  would  be  im- 
possible for  either  the  owners  of  the  properties  or  the 
public  to  bring  anybody  to  an  accountability  for  the 
results  of  their  management  or  mismanagement. 

Most  of  the  matter  in  the  chapters  on  "Railways 
and  Waterways"  is  from  an  article  by  the  author 
which  was  published  in  Scribner's  Magazine,  in  June, 
1910,  entitled  "The  Proposed  Development  of  Inland 
Waterways."  Parts  of  an  article  by  the  author  en- 
titled "Fair  Regulation  of  Railways,"  published  in 
the  North  American  Review  for  April,  1910,  have 
been  used  in  the  chapters  on  "Government  Regula- 
tion." My  thanks  are  due  to  the  editors  of  these  pub- 
lications for  their  kind  permissions  to  make  use  of 
this  material  here. 

S.  0.  D. 

Chicago,  December  15,  1911. 


IX 


CONTENTS 


CHAPTER  PAGE 

I.— Principles  of  Railway  Ratemaking:  Cost  of 

THE  Service 1 

II.— Principles   of  Railway  Ratemaking:  Value 

of  the  Service 19 

III. — Discrimination    Between    Commodities    and 

Communities 42 

IV. — Discrimination     Between     Shippers  —  Reme- 
dies FOR  Discrimination 62 

V. — Railway  Valuation  and  Profits   .      .      .      .81 

VI. — Railway  Valuation  and  Profits  (Continued)  .  Ill 

VII. — Railway  Efficiency  from  the  Standpoint  of 

Economy 124 

VIII. — Railway  Efficiency  from  the  Standpoint  of 

Public  Service 153 

IX.— Railways  and  Inland  Waterways:    Costs  of 

Rail  and  Water  Transportation    .      .      .178 

X.— Inland  Waterways  as  Regulators  of  Rail- 
way Rates 206 

XL— Government  Regulation:  Who  Shall  Regu- 
late?   222 

XII.— Government  Regulation:   Underlying  Prin- 
ciples   246 

Index 281 

xi 


THE   AMERICAN   TRANSPORTATION 
QUESTION 

CHAPTER  I 

PRINCIPLES   OF   RATEMAKING:  COST  OF  THE 
SERVICE 

The  part  of  the  transportation  business  which 
has  received  the  most  public  discussion  and  regu- 
lation is  railway  rates.  The  complex  rate  struc- 
ture, and  especially  the  freight-rate  structure, 
seems  to  the  average  man  "confusion  worse  con- 
founded." Even  the  expert  who  thoroughly  un- 
derstands the  conditions  and  causes  that  have 
produced  the  rates  in  one  section  is  apt  to  be 
graveled  if  he  tries  to  analyze  and  explain  those 
in  another  section.  Civilized  man  has  inherited 
from  his  primitive  progenitors  a  strong  tendency 
to  suspect  and  fear  whatever  affects  his  welfare 
which  he  cannot  understand.  The  average  man, 
not  being  a  railway  expert,  is  apt  to  attribute  the 
complexities,  and  seeming  or  real  inconsistencies 
and  injustices,  in  rates  to  the  railway  traffic  man- 
ager's incompetency,  caprice  or  unfairness.  He 
cannot  discern    any   well-founded    principles    on 

1 


THE   AMERICAN   TRANSPORTATION    QUESTION 

which  the  traffic  man  has  acted;  and  he  thinks  the 
worst  suspicions  engendered  by  inspection  and 
experience  of  the  rates  confirmed  when  high  rail- 
way officers  go  on  the  witness  stand  before  the 
Interstate  Commerce  Commission  or  the  courts,  as 
they  sometimes  have,  and  say  that  rates  are  made 
by  "instinct"  or  "intuition"— that  they  "just 
happen  so." ' 

While    many    rates,    like    Topsy,    have    "just 
growed,"  you  will  find  if  you  study  the  history  of 


*The  following,  from  a  paper  by  the  author  entitled 
"Basic  Principles  of  Rates,"  which  was  published  by  the 
La  Salle  Extension  University  and  used  by  it  in  its  inter- 
state commerce  course,  conveys,  I  think,  the  idea  that  rail- 
way men  have  in  mind  when  they  say  that  they  fix  rates  by 
"instinct,"  or  "intuition": 

"A  short  time  ago,  when  the  traffic  manager  of  a  large 
railway  was  testifying  in  a  proceeding  before  the  railway 
commission  of  a  Southern  state,  the  lawyer  who  was  cross- 
examining  him  asked  him  how  he  knew  what  was  the  cor- 
rect rate  to  make  on  a  certain  commodity  between  two 
given  points.  The  traffic  manager  said  he  'guessed'  at  it. 
For  this  statement  he  was  ridiculed  by  the  newspapers.  It 
was  said  that  if  railway  traffic  managers  just  'guessed' 
what  rates  ought  to  be,  there  surely  could  be  no  harm  in 
giving  the  ratemaking  power  to  railway  commissions,  as 
they  probably  could  'guess'  as  well  as  the  traffic  manager. 
But  let  us  see  if  the  ridicule  and  the  inference  from  the 
traffic  manager's  statement  were  justifiable. 

"If  any  of  my  readers  have  lived  on  farms  where  cattle 
are  fattened  for  market,  they  know  that  there  are  cattle 
buyers  who  will  go  into  a  pasture  and  buy  a  carload  of  fat 
steers  'by  guess.'  That  is,  they  will  judge  by  looking  them 
over  what  they  will  weigh,  and  will  purchase  them  without 

2 


COST   OF  THE   SERVICE 

railway  rate  development,  that,  like  other  economic 
and  social  phenomena,  it  has  taken  place  along 
well-defined  lines  and  according  to  pretty  clearly 
discernible  principles.  The  historical  method  of 
investigation  often  explains  what  it  cannot  jus- 
tify. Sometimes  it  explains  and  justifies  what  at 
first  seemed  neither  explicable  nor  justifiable. 

The  railway  is  the  offspring  of  the  turnpike 
company  and  of  the  common  carrier  by  wagon  and 
stage-coach.    It  has  features  and  characteristics 


driving  them  over  the  scales.  So  skillful  are  they  in  esti- 
mating the  weight  of  a  steer  that  they  seldom  lose  any 
money  by  buying  this  way,  while  it  would  be  very  risky  for 
most  people  to  estimate  values  in  this  manner. 

"Now,  why  is  this  so?  It  is  because  the  cattle  buyer  is 
an  expert  at  this  sort  of  thing.  He  knows  what  weight 
and  quality  of  meat  are  indicated  by  a  given  depth  and 
length  of  neck  and  body,  size  of  bone,  breadth  of  back,  and 
general  conformation,  because  he  has  seen  thousands  of 
steers  of  all  kinds  weighed.  When  he  looks  over  a  bunch  of 
steers  he  seems  to  know  intuitively  how  much  he  can  afford 
to  pay.  But,  as  a  matter  of  fact,  his  'guessing'  is  perhaps 
an  unconscious  application  to  each  steer  of  general  princi- 
ples derived  from  observation  and  experience. 

"Now,  the  difference  between  the  'guessing'  of  an  ex- 
pert and  a  tyro  about  the  value  of  a  steer  is  similar  to  the 
difference  between  the  'guessing'  of  an  expert  and  a  tyro 
about  what  a  given  freight  rate  ought  to  be.  The  traffic 
manager's  'guessing'  is  the  exercise  of  judgment,  developed 
to  a  degree  approaching  perfection,  by  long  experience,  and 
guided  by  knowledge  of  the  fundamental  principles  of  rate- 
making  and  intimate  acquaintance  with  the  special  trans- 
portation and  commercial  conditions  under  which  his  road 
operates. ' ' 

3 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  both  its  parents.  The  turnpike  company  fur- 
nished a  highway,  but  no  carriage.  The  carriers 
by  wagon  and  stage-coach  furnished  carriage,  but 
no  highway.  The  turnpike  company  exacted  tolls 
for  passage.  The  carriers  by  wagon  and  stage- 
coach made  charges  for  carriage.  The  railway 
furnishes  both  a  highway  and  carriage,  and 
charges  both  for  the  passage  and  for  the  carriage 
of  goods  and  passengers.  The  turnpike  company 
charged  more  for  the  passage  of  vehicles  of  luxury 
and  pleasure  than  for  carts  and  wagons,  because 
the  owners  of  the  former  could  afford  to  pay  more ;' 
it  based  the  rates  for  the  privilege  of  passage  on 
its  value.  The  early  canal  companies,  which,  like 
the  turnpike  companies,  furnished  no  carriage, 
but  merely  highways,  based  their  tolls  on  the 
value  of  the  goods;  while  the  owners  of  the  boats 
based  their  charges  on  movement  expenses. 

From  the  first  the  railway  was  faced  by  both 
the  carrier's  problem  of  getting  revenue  some- 
what in  excess  of  movement  expenses,  and  the 
turnpike  and  canal  companies'  problem  of  getting 
enough  to  pay  a  return  on  a  large  and  irreducible 

'Said  Adam  Smith  ("Wealth  of  Nations,"  Book  V,  p. 
326,  McCulloch's  Ed.)  :  "When  the  toll  upon  carriages,  post- 
chaises,  etc.,  is  made  somewhat  higher  in  proportion  to 
their  weight  than  upon  carriages  of  necessary  use,  such  as 
carts  and  wagons,  etc.,  the  indolence  and  vanity  of  the  rich 
are  made  to  contribute  in  a  very  easy  manner  to  the  relief 
of  the  poor  by  rendering  cheaper  the  transportation  of  heavy 
goods  to  all  the  different  parts  of  the  country. " 

4 


COST   OF   THE   SERVICE 

fixed  investment.  The  early  railway  solved  the 
problem  in  a  perfectly  natural  way.  It  fixed 
charges  for  carriage,  like  those  of  the  carrier  by 
wagon  or  canal  boat,  which  were  based  on  move- 
ment expenses;  and  also  separate  tolls  for  pas- 
sage, which,  like  those  of  the  turnpike  and  canal 
companies,  were  based  on  the  values,  or  the  abili- 
ties to  pay,  of  the  things,  or  persons,  transported. 
One  reason  for  this  was  the  expectation  that  car- 
riers other  than  the  owners  of  the  highway  would 
haul  passengers  and  goods  on  it  in  their  own  vehi- 
cles. This  being  found  impracticable  the  toll  for 
passage  and  the  charge  for  carriage  were  merged 
in  railway  "rates." 

While  this  simplified  the  tariffs,  it  did  not  make 
it  either  simpler  or  less  necessary  to  so  adjust 
rates  as  to  earn  a  return  for  a  service,  part  of  the 
expenses  of  which  depended  mainly,  like  that  of 
the  carrier  by  wagon,  on  the  amount  of  business 
done,  and  part  of  which,  like  that  of  the  turn- 
pike company,  depended  hardly  at  all  on  the 
amount  of  business  done.  In  their  anxiety  to 
earn  enough  to  cover  both  these  kinds  of  expenses, 
the  early  railway  managers  made  their  rates  high. 
It  was  doubted  if  railways  would  ever  be  able  to 
compete  effectively  for  cheap  and  bulky  traflfic 
against  canal  boats ;  that  they  would  ever  be  able 
to  compete  with  coastwise  vessels  seemed  most 
improbable.  The  directors  of  the  Pennsylvania 
Railroad  did  not  think  coal  traffic  worth  seeking 
2  5 


THE    AMERICAN    TRANSPORTATION    (QUESTION 

bec-ause  it  could  not  be  got  for  more  than  2  cents 
per  ton  per  mile!'  It  is  said  a  director  of  the 
London  and  Birmingham,  when  it  was  suggested 
to  him  that  his  aristocratic  line  carry  coal  to 
London  in  competition  with  the  Grand  Junction 
Canal  and  the  Newcastle  coal  brigs,  exclaimed: 
"Coal!  Why,  they  will  be  asking  us  to  carry  dung 
next!"  2 

But  soon  an  important  discovery  in  railway  eco- 
nomics was  made;  just  who  was  its  Columbus  I  do 
not  know.  This  discovery  was,  that  on  a  road  not 
being  worked  to  its  full  capacity,  traffic  need  not, 
to  be  worth  taking,  yield  enough  to  cover  both  its 
movement  expenses  and  a  proportionate  share  for 
fixed  charges.  The  fixed  charges  of  a  railway, 
like  the  fixed  charges  of  a  turnpike  company,  had 
to  be  paid  whether  the  traffic  was  small  or  great. 
Therefore,  if  the  revenue  from  traffic  which  could 
not  be  got  except  at  a  low  rate  would  pay  the 
movement  expenses  its  transportation  added  to 
previous  movement  expenses  and,  besides,  con- 
tribute anything,  however  little,  to  fixed  charges, 
it  was  desirable. 

Suppose  a  road  was  hauling  225,000  tons  at  2 
cents  per  ton,  its  gross  earnings  therefrom  being 
$4,500;   and    that    its    operating    expenses  were 

'  The  Pennsylvania's  average  freight  rate  per  ton  per 
mile  in  1910  was  5.83  mills. 

"Acworth's  "Elements  of  Railway  Economics,"  page 
63. 

6 


COST   OF   THE   SERVICE 

$2,500  and  its  fixed  charges,  $2,500.  It  had  a  defi- 
cit, then,  of  $500.  I  have  made  the  figures  small 
for  the  sake  of  simplicity;  the  reader  may  add  as 
many  ciphers  as  he  likes.  Suppose  there  were 
145,000  tons  of  traffic  it  could  get  at  a  rate  of  not 
more  than  IJ  cents  per  ton,  and  that  the  average 
movement  expenses  per  ton  for  handling  it  would 
be  the  same  as  for  handling  the  traffic  it  already 
had.  Was  the  traffic  worth  taking?  It  was.  The 
movement  expenses  of  hauling  it  would  be  at  the 
rate  of  1.11  cents  per  ton,  or  $1,609.50;  the  gross 
earnings  from  it  would  be  1.5  cents  per  ton,  or 
$2,175,  leaving  $565.50  net,  or  $65.50  more  than 
enough  to  cure  the  deficit.  Every  ton  of  the  traffic 
which  the  road  was  handling  before  earned  over 
the  movement  expenses  an  average  of  8.9  mills  for 
fixed  charges.  The  new  traffic  earned  less  than 
half  as  much  per  ton  over  movement  expenses  for 
fixed  charges,  or  but  3.9  mills.  But  while  it  did 
not  contribute  as  much  per  ton  to  the  total  ex- 
penses of  the  business,  including  fixed  charges,  the 
taking  or  not  taking  of  it  was  the  difference  be- 
tween bankruptcy  and  solvency. 

On  a  railway  which  is  not  working  to  its  full 
capacity  and  on  which  unit  costs  of  labor,  mate- 
rials and  interest  are  stationary,  the  law  of  in- 
creasing returns  operates  with  even  more  force 
than  is  indicated  by  this  illustration.  Not  only  do 
not  fixed  charges  increase  as  the  traffic  increases, 
but  neither,  in  these  circumstances,  do  mainte- 

7 


THE    AMERICAN    TRANSPORTATION    QUESTION 

nance  or  opcratinpr  expenses.  It  costs  a  good  deal 
less  than  twice  as  much  to  haul  a  car  full  as  to 
haul  it  half  full;  it  costs  a  good  deal  less  than 
twice  as  much  to  run  an  engine  fully  loaded  as  to 
run  it  half  loaded;  it  costs  a  good  deal  less  than 
twice  as  much  to  maintain  a  track  which  is  being 
operated  to  its  full  capacity  than  one  which  is  be- 
ing operated  to  only  half  its  capacity. 

These  principles  were  rapidly  and  successfully 
applied,  especially  in  the  United  States,  in  the  re- 
duction of  rates  on, '  and  the  development  of,  three 
kinds  of  traffic: 

1.  Traffic  in  cheap  and  bulky  commodities, 
which,  because  of  their  low  value,  could  not  bear 
high  rates. 

2.  Traffic  moving  long  distances.  The  charges 
of  the  carriers  by  wagon,  and  the  tolls  of  the  turn- 
pike and  canal  companies,  had  increased  rapidly 
as  distance  increased.  It  was  not  possible  for  the 
railway  to  make  all  of  its  rates  this  way.  The 
carrier  by  wagon  hauled  the  goods  only  a  short 
distance.  The  turnpike  company  gave  passage 
but  for  a  short  distance.  Railways  rapidly  grew 
to  great  lengths,  and  wanted  to  haul  goods  for 

'  These  statements  and  the  subsequent  discussion  relate 
almost  exclusively  to  freight  rates  and  tariffs.  Passenger 
rates  ai-e  usually  much  simpler  than  freight  rates,  being 
commonly  based  mainly  on  distance.  The  traffic  is  of  such 
nearly  uniform  character  that  the  difficulties  and  complexi- 
ties of  adjusting  rates  for  handling  it  are  much  smaller. 

8 


COST   OF   THE   SERVICE 

long  distances.  But  rates  which  increased  as  dis- 
tance increased  were  incompatible  with  long  hauls, 
especially  of  cheap  and  bulky  commodities.  Coal 
might  easily  move  twenty  miles  for  a  rate  of  2 
cents  per  ton  per  mile.  But  2  cents  per  ton  per 
mile  for  500  miles  would  be  $10  a  ton. 

3.  Competitive  traffic,  whether  the  competitors 
for  it  were  canal  boats,  coastwise  steamers  or 
other  railways.  The  railway  could  not  get  on  any 
traffic  more  than  the  lowest  rate  which  had  been 
fixed  by  a  competing  carrier,  due  allowance  being 
made  for  differences  in  service.  In  many  cases 
railways  made  lower  rates  for  longer  hauls  to 
points  where  they  met  competition  than  for  short- 
er hauls  to  points  where  they  did  not  meet  it. 
They  made  relatively  low  rates  for  cheap  com- 
modities and  long  distances  because  the  traffic 
could  not  bear  higher  rates.  They  made  these  low 
rates  for  competitive  traffic  because,  owing  to  its 
ability  to  move  by  some  other  route  or  routes,  it 
would  not  bear  higher  rates. 

This  has  been  described  as  the  system  of  charg- 
ing ''what  the  traffic  will  bear."  Dr.  Hadley^ 
amended  the  description  to  "  Charging  what  the 
traffic  will  bear,  and  not  charging  what  it  will  not 
bear."  But  this  fixes  merely  the  maximum  limit 
of  rates ;  what  the  railway  can  bear  fixes  the  mini- 

'  "Railroad  Transportation — Its  History  and  Laws,"  by 
A.  T.  Hadley. 

9 


THE    AMIOKICAN    TRANSPORTATION    QUESTION 

mum.  "What  the  traffic  will  bear"  '  is  measured 
by  the  value  of  the  service  rendered  to  the  ship- 
per; he  will  not  pay  more  for  it  than  it  is  worth  to 
him.  What  the  railroad  can  bear  is  measured  by 
whether  a  rate  will  increase  gross  earnings  more 
than  the  transportation  of  the  commodity  to  which 
it  is  proposed  to  apply  it  will  increase  operating 
expenses;  it  cannot  afford  to  take  any  business  for 
any  rate  that  will  not  do  this.  Between  these  su- 
perior and  inferior  limits — the  value  of  the  service 
to  the  shipper,  and  the  minimum,  or  additional, 

*  It  is  often  said  that  railways  charge  all  that  the  traffic 
can  bear.  Railway  managers  denounce  this  as  a  misstate- 
ment of  the  principle  on  which  they  have  acted.  E.  P.  Rip- 
ley was  for  many  years  a  distinguished  traffic  officer  before 
he  became  President  of  the  Atchison,  Topeka  &  Santa  Fe, 
and,  both  because  of  this  experience  and  of  his  great  ability 
to  think  and  speak  clearly,  an  expression  from  him  is  en- 
titled to  much  weight.  In  testifying  before  the  Interstate 
Commerce  Commission  at  Chicago  in  September,  1910,  in 
cases  involving  the  reasonableness  of  advances  in  freight 
rate  which  the  railways  proposed  to  make,  Mr.  Ripley  said: 

"First  and  foremost  there  never  was  any  better  defini- 
tion of  a  reasonable  rate  than  that  which  was  given  many 
years  ago  by  somebody  and  which  has  been  used  as  a  byword 
and  a  reproach  ever  since,  namely,  'what  the  traffic  will 
bear. '  That  is  the  best  definition  which  was  ever  given  of 
it.  That  does  not  mean  all  the  traffic  will  bear;  it  does  not 
mean  all  that  can  be  extorted  or  squeezed  out  of  it,  but 
what  the  traffic  will  bear,  having  regard  to  the  freest  pos- 
sible movement  of  commodities,  the  least  possible  burden 
on  the  producer  and  on  the  consumer.  The  middleman  can 
take  care  of  himself.  But  with  these  two  qualifications,  a 
reasonable  rate  is  what  the  traffic  will  bear." 

10 


COST   OF   THE   SERVICE 

cost  of  the  service  to  the  railway — all  rates  have 
been,  or  ought  to  have  been,  fixed.  The  object  of 
the  railway  manager  has  been  to  get  the  maximum 
net  return  from  the  total  business.  In  pursuance 
of  this  object  he  has  tried  to  fix  each  rate  at  that 
point  between  these  maximum  and  minimum  lim- 
its where,  under  the  special  conditions  of  the  case, 
he  would  get  the  particular  volume  of  traffic  which 
would  yield  the  largest  return  over  the  operating 
expenses  which  the  handling  of  the  particular 
traffic  added  to  other  operating  expenses.  This 
often  has  involved  making  rates  per  ton  per  mile 
much  higher  on  valuable  than  on  cheap  and  bulky 
commodities,  on  non-competitive  than  on  competi- 
tive traffic,  and  for  short  hauls  than  for  long  hauls; 
and  it  usually  also  has  involved  making  the  rates 
substantially  less  than  the  maximum  value  of  the 
service  to  the  shipper  and  substantially  more  than 
the  minimum  additional  cost  of  the  service  to  the 
railway. 

The  foregoing  gives  some  idea,  however  inade- 
quate, of  the  way  in  which,  and  the  principles  ac- 
cording to  which,  the  complicated  rate  structure, 
and  especially  the  complicated  freight-rate  struc- 
ture, of  the  United  States  has  been  developed. 
Railway  rates  in  other  countries  have  been  devel- 
oped along  much  the  same  lines  and  according  to 
much  the  same  principles.  The  main  difference 
has  been  that  in  many  foreign  countries  more  con- 
sideration has  been  given  to  the  cost  of  the  ser- 

11 


TIIR    AMERICAN    TRANSPORTATION    QUESTION 

vice  as  compared  with  the  value  of  the  service — in 
other  words,  to  the  average  cost  of  the  service  as 
distinguished  from  the  additional  cost;  and  to  this 
the  greater  density  of  freight  traffic  that  has  been 
developed  here,  and  the  lower  average  rate  at 
which  it  is  handled,  are  largely  due.' 

There  have  been  innumerable  criticisms  of  the 
way  American  railway  rates  have  been  made. 
Some  of  these  have  gone  merely  to  the  way  the 
underlying  principles  have  been  applied — or  mis- 
applied; others  to  the  principles  themselves.  I 
shall  discuss  the  specific  subject  of  railway  dis- 
crimination in  later  chapters.  Such  discussion 
should  logically  be  preceded  by  consideration  of 
what  are  the  standards  by  which  the  fairness  of 
rates  ought  to  be  measured.  This  is  my  task  in 
the  present  and  the  next  chapters. 

One  class  of  persons — including  most  railway 
managers,  a  great  many  economists  and  some  reg- 
ulating authorities — think  that  rates  should  be 
based  mainly,  or  even  almost  wholly,  on  the  value 
of  the  service.  Another  class — including  a  very 
few  railway  men,  some  economists,  probably  a 
majority  of  railway   regulating  authorities,  and 


'  The  density  of  freight  traffic— tons  hauled  one  mile  per 
mile  of  line— on  the  French  railways  (1907)  is  496,939;  on 
the  German  railways  (1908),  827,390;  and  on  the  railways  of 
the  United  States  (1910),  1,085,745.  The  average  rates  per 
ton  per  mile  are  :  France  (1907),  12.8  mills  ;  Germany  (1908), 
12.7  mills;  United  States  (1910),  7.53  mills. 

12 


COST   OF   THE   SERVICE 

most  of  the  general  public — think  that  rates  should 
be  based  mainly,  or  even  almost  wholly,  on  the 
cost  of  the  service. 

Many  railway  men  in  their  public  utterances  say 
that  rates  cannot  and  ought  not  to  be  based  to  any 
considerable  degree  on  cost  of  service.  Their 
practice  refutes  their  theory.  Transportation 
costs  are  of  two  kinds — terminal  and  road  haulage. 
The  former  are  the  same  per  ton  whether  a  ship- 
ment moves  one  mile  or  a  thousand  miles.  The 
latter  increases  with  distance.  Now,  every  rail- 
way has  at  the  foundation  of  its  rate  structure  a 
distance  tariff,  the  rates  in  which  are  very  high 
per  ton  per  mile  for  short  hauls,  and  rapidly  di- 
minish per  ton  per  mile  as  the  length  of  the  haul 
increases.  Unless  competition  interferes,  rates 
always  increase  in  absolute  amount  with,  although 
not  in  proportion  to,  distance,  until  they  reach  a 
point  where  they  can  be  made  no  higher  without 
obstructing  the  movement  of  traffic.  Why  are 
rates  constructed  thus?  Obviously,  one  reason 
why  they  usually  are  made  higher  per  ton  per  mile 
for  short  than  for  long  distances  is  that  it  is  be- 
lieved the  short  distance  as  well  as  the  long  dis- 
tance traffic  should  pay  its  own  terminal  expenses ; 
and  they  usually  increase  in  absolute  amount  with 
distance  because  ordinarilythe  farther  a  shipment 
moves  the  more  its  haulage  costs. 

Again,  higher  rates  per  ton  per  mile  are  ordi- 
narily charged  on  local  than  on  through  traffic  be- 

13 


THE    AMERICAN    TRANSI'ORTATION    QUESTION 

cause,  as  local  traffic  moves  in  smaller  car  loads 
and  the  trains  transporting  it  make  frequent  stops, 
it  costs  more  in  proportion  to  haul  it.  Higher 
rates  are  charged  for  freight  in  less-than-car  lots 
because,  owing  to  the  larger  station  and  account- 
ing expenses  that  must  be  incurred  for  the  less- 
than-car  lot  freight,  and  to  the  fact  that  it  moves 
in  smaller  quantities  per  car,  its  transportation 
costs  more.  If  costs  cut  no  figure  in  railway  rates, 
they  would  be  like  postal  charges,  the  same  for  all 
distances. 

Cost  largely  influences  the  fixing  of  rates,  not 
only  on  the  same  article  when  hauled  under  differ- 
ent conditions,  and  different  distances,  but  on 
different  articles.  There  are  three  important 
classifications  of  freight  on  the  railways  of  the 
United  States:  the  Official,  in  the  territory  east  of 
the  Mississippi  River  and  north  of  the  Ohio  and 
the  Potomac;  the  Southern,  in  the  territory  east 
of  the  Mississippi  River  and  south  of  the  Ohio  and 
the  Potomac;  and  the  Western,  in  the  rest  of  the 
country.  These  classifications  group  commodities, 
according  to  their  varying  characteristics  and  the 
varying  conditions  under  which  they  are  trans- 
ported, into  from  6  to  10  classes.  The  same  rate 
applies  for  any  given  distance  on  all  the  articles  in 
a  class,  but  the  rate  is  different  for  each  class. 
The  first-class  rate  between  Chicago  and  New 
York,  for  example,  is  75  cents;  the  sixth-class 
rate,  25  cents,  or  66s  per  cent.  less.     Now,  of  two 

14 


COST   OF   THE   SERVICE 

articles  having  the  same  value  per  ton,  that  which 
has  the  greater  ratio  of  bulk  to- weight  will,  other 
things  being  equal,  be  put  in  the  higher  class. 
Likewise,  of  two  articles  having  similar  values 
and  bulks  per  ton,  but  one  of  which  is  more  risky 
to  handle  than  the  other,  that  which  is  the  more 
risky  to  handle  v/ill,  other  things  being  equal, 
be  required  to  pay  a  higher  rate. 

Furthermore,  when  the  railways  go  into  court  to 
defend  rates  made  by  their  officers  or  to  attack 
those  prescribed  by  legislatures  or  commissions, 
they  very  generally  base  their  defense  or  attack 
on  the  ground  that  the  rates  made  by  their  own 
officers  are  not  too  high  in  proportion  to  the  cost 
of  the  service,  or  that  those  prescribed  by  the  reg- 
ulating authorities  are  too  low  in  proportion  to  it. 
Where  entire  schedules  of  rates  are  involved,  they 
include  in  their  estimates  of  cost  both  operating 
expenses  and  fixed  charges  and  what  they  con- 
sider reasonable  dividends. 

The  truth  of  the  matter  is,  that  when  the  rail- 
way man  asserts  cost  of  service  should  not  be  a 
factor  in  ratemaking,  he  does  not  mean  it.  The 
seeming  inconsistency  may  be  due  to  the  fact  that 
his  business  has  been  to  so  adjust  rates  as  to  move 
the  traffic,  not  to  analyze  and  theorize  about  the 
principles  on  which  he  acts,  and  that  consequently, 
like  most  practical  business  men,  when  he  tries  to 
state  the  principles  by  which  he  has  been,  and 
thinks  he  should  be,  guided  he  is  apt  not  to  make 

15 


THE    AMERICAN    TRANSPORTATION    QUESTION 

himself  clear.  What  he  really  means,  I  think,  is 
merely  that  the  average  total  cost  of  service,  which 
is  what  is  generally  meant  by  "cost  of  service," 
cannot  and  should  not  be  used  as  a  basis  for  mak- 
ing rates.  For  the  words  "cost  of  service"  do  not 
always  mean  the  same  thing  to  him  and  others,  or 
even  to  him  at  different  times.  If  he  is  consider- 
ing what  is  the  very  lowest  rate  he  can  afford  to 
make,  he  thinks  only  of  the  additional  expense 
that  handling  the  additional  traffic  will  cause. 
The  additional  cost  of  handling  certain  traffic  may 
be  but  four  mills  per  ton  per  mile;  if  the  traffic 
manager  can  get  it  with  a  rate  of  five  mills,  and 
no  more,  it  is  worth  having  at  that  rate.  But  if 
the  road's  average  cost  of  handling  all  traffic  is 
eight  mills,  obviously  he  could  not  take  all  traffic 
for  five  mills.  Since  he  must  get  an  average  of 
eight  mills,  he  makes  all  traffic  that  cannot  pay 
that  much  pay  as  near  it  as  it  reasonably  can,  and 
then  offsets  the  traffic  which  cannot  pay  the  aver- 
age cost  with  traffic  that  is  required  to  pay  more 
than  the  average  cost. 

The  charge  is  often  made,  and  with  good  reason, 
that  in  many  instances  the  railways  have  not 
given  due  weight  to  cost  of  service.  In  some  in- 
stances they  have  made  rates  which  did  not  cover 
even  the  additional  cost.  This  involves  positive 
loss  which  has  to  be  made  good  by  making  some 
rates  needlessly  high.  In  other  cases  they  have 
made  rates  lower  in  proportion  to  cost  than  was 

16 


COST   OF   THE   SERVICE 

necessary  to  avoid  interfering  with  the  movement 
and  growth  of  the  traffic.  This  is  contrary  to 
sound  principles.  Every  species  of  traffic  should 
contribute  to  the  total  cost  of  operation  as  nearly 
in  proportion  to  the  expenses  incurred  in  handling 
it  as  it  reasonably  can.  On  no  defensible  princi- 
ple can  part  of  the  traffic  be  charged  more  than 
its  proportionate  share,  and  other  traffic  less  than 
its  proportionate  share,  unless  it  is  not  reasonably 
practicable  for  the  latter  to  pay  its  full  proportion- 
ate share. 

One  of  the  main  obstacles  to  the  better  appor- 
tionment of  rates  according  to  costs  has  been  the 
failure  of  the  railways  to  develop  as  good  methods 
of  cost  accounting  as  are  in  use  in  many  manufac- 
turing concerns.  Some  railway  men  say  that  the 
element  of  joint  cost  in  their  business  is  so  large 
that  accurate  cost  accounting  is  impracticable.  In 
every  system  of  cost  accounting  it  is  necessary  to 
allocate  fixed  charges  and  many  other  expenses  on 
more  or  less  arbitrary  bases,  but  this  does  not  keep 
them  from  being  approximately  accurate,  and  use- 
ful as  guides  in  fixing  prices.  In  the  opinion  of 
some  who  have  given  great  attention  to  the  mat- 
ter it  would  be  practicable  to  work  out  pretty  ac- 
curate and  useful  railway  cost  accounting  sys- 
tems.^   The  railways  introduce  very  elaborate  cost 

'  See  the  very  able  opinion  of  the  Railroad  Commission 
of  Wisconsin  in  the  passenger  rate  cases  decided  in  1907 ; 
particularly,  Buell  vs.  C.  M.  &  St.  P.  Ry. 

17 


THE    AMERICAN    TRANSPORTATION    QUESTION 

figures  in  rate  cases;  and  it  is  a  stigma  on  railway 
management  that  the  bases  on  which  the  calcula- 
tions have  been  made  sometimes  have  been  changed 
from  case  to  case,  from  state  to  state,  and  as  ap- 
plied to  state  and  interstate  business,  so  as  to  have 
shown  that  some  prosperous  railways  are  losing 
money  on  every  single  branch  of  their  business! 
When  figures  prove  that  the  sum  of  all  the  parts  is 
less  than  the  whole  there  is  something  wrong  with 
them.  If  railways  can  work  out  cost  figures  to 
defend  or  attack  rates  they  can  work  them  out  as 
more  or  less  useful  guides  for  making  rates.  If 
the  operating  expenses  of  handling  each  kind  of 
trafl^c  were  more  carefully  calculated,  some  rates 
that  are  now  made  would  not  be  made,  and  some 
would  be  raised,  and  others  reduced. 


CHAPTER  II 

PRINCIPLES    OF    RATEMAKING:    VALUE   OF   THE 
SERVICE 

Many  persons  go  so  far  as  to  contend  that  rail- 
way rates  ought  to  have  been  based  mainly,  or  en- 
tirely, on  cost  of  service,  and  that  the  existing 
rate  structure  ought  to  be  so  revolutionized  as  to 
put  them  mainly  or  wholly  on  that  basis.  It  is 
said  that  this  is  the  way  prices  are  fixed  in  other 
businesses,  and  that  it  is  the  only  fair  way  to  fix 
either  prices  for  goods  or  charges  for  services. 
This  is  carrying  the  cost  of  service  theory  much 
too  far.  It  is  not  true,  as  is  commonly  assumed, 
that  the  method  of  making  railway  rates  according 
to  value  given  as  well  as  cost  incurred  is  an  anom- 
aly in  industrial  price  making.  Even  if  it  were 
that  would  not  be  reason  enough  for  trying  to  rev- 
olutionize it. 

The  manufacturer  who  makes,  or  the  merchant 
who  sells,  but  one  thing  usually  tries  to  base  his 
price  on  cost.  But  even  he  often  sells  at  the  same 
price  in  different  sections  of  the  country,  where, 
to  the  extent  of  differences  in  freight  rates,  his 
costs  are  different;  and  he  often  makes  different 
prices  to  different  customers  where  costs  are  not 

19 


THE    AMERICAN    TRANSPORTATION    QUESTION 

different.  The  manufacturer  or  merchant  who 
makes  or  sells  numerous  things  having  widely 
varying  values,  and  in  whose  business,  therefore, 
as  in  the  railway  business,  there  is  a  large  element 
of  joint  cost,  fixes  his  prices  with  as  little  regard 
to  cost  as  the  railway  does  its  rates. 

Take,  for  example,  the  case  of  the  meat  packer. 
He  pays,  perhaps,  $8  per  100  pounds  for  a  steer. 
He  makes  a  number  of  things  from  the  carcass — 
steaks,  roasts,  etc.,  and,  finally,  from  the  residue, 
fertilizer.  He  does  not  sell  100  pounds  of  each  for 
the  average  cost  per  100  pounds  of  the  steer,  plus 
proportionate  parts  of  the  expense  of  operating 
his  factory  and  his  overhead  charges.  He  sells 
porterhouse  steaks  for  a  great  deal  more  than  this; 
he  sells  fertilizer  for  very  much  less.  He  bases 
his  price  for  each  on  its  market  value.  He  does 
not  try  to  base  his  prices  on  his  average  costs,  be- 
cause if  he  did  the  prices  of  his  higher  class  prod- 
ucts would  not  equal,  and  the  prices  of  his  lower 
grade  products  would  exceed,  their  value  to  his 
patrons,  and  his  profits  would  be  reduced  both  be- 
cause he  accepted  less  for  porterhouse  steaks  than 
they  were  worth  and  because  he  tried  to  get  more 
for  fertilizer  than  any  one  would  pay. 

The  analogy  with  railway  ratemaking  is  perfect. 
The  stone  and  sand  traffic  is  the  railway's  fertil- 
izer; the  dry  goods  and  other  high  class  traffic  is 
its  porterhouse  steaks.  The  packer  keeps  cost  ac- 
counts; but  they  are  not  his  only  or  principal  guide 

20 


VALUE   OF   THE   SERVICE 

in  making  prices.  He  consults  them  to  see  if  the 
prices  of  the  articles  he  sells  at  less  than  average 
cost  cover  the  additional  cost  of  making  them.  If 
they  do,  and  the  prices  he  gets  are  the  highest  he 
can  reasonably  obtain  without  injuring  his  market, 
and  he  receives  a  substantial  profit  on  all  his  busi- 
ness, he  is  satisfied. 

But,  it  is  said,  the  railway,  being  a  public  util- 
ity, has  no  right  to  ignore  cost  and  base  its 
charges  on  value  to  the  same  extent  as  industrial 
concerns.  As  a  matter  of  fact,  almost  every  pub- 
lic utility  to  a  very  great  degree  bases  its  rates  on 
the  value  of  its  services,  and  regulating  commis- 
sions, with  public  approval,  permit,  and  sometimes 
require,  this.  The  Pullman  company  formerly 
charged  the  same  rate  for  an  upper  as  for  a  lower 
sleeping-car  berth.  The  Interstate  Commerce 
Commission  ordered  it  to  make  its  rates  for  upper 
berths  less  than  for  lower  berths.  The  public  ap- 
proved, and  the  Pullman  company  is  complying. 
Now,  it  costs  more  to  build  the  upper  berth ;  in  the 
day  time  the  upper  berth  passenger  has  one  of  the 
seats  which  at  night  are  used  to  make  the  lower 
berth ;  and  it  is  more  work  for  the  porter  to  make 
up  the  upper.  Therefore,  to  require  a  lower  rate 
for  the  upper  berth  is  contrary  to  the  cost  of  ser- 
vice theory.  It  is  justifiable  only  because  the 
lower  berth  service  is  the  more  valuable. 

Again,  the  telegraph  companies  charge  75  cents 
for  sending  50  words  in  the  form  of  a  day  letter 
3  21 


THE    AMERICAN    TRANSPORTATION    QUESTION 

from  Chicago  to  New  York;  at  night,  in  the  form 
of  a  night  letter,  they  send  50  words  for  50  cents; 
and  their  day  press  rates  are  double  their  night 
press  rates.  These  differences  entirely  disregard 
cost  of  service,  for  the  companies'  fixed  charges 
at  night  are  the  same  as  in  the  daytime,  and  their 
operating  expenses  per  word  are  no  less,  and  prob- 
ably greater.  The  lower  rates  are  based  on  value 
of  service,  and  are  made  to  stimulate  business 
when  the  wires  are  not  busy. 

Electric  light  and  power  companies  make  lower 
rates  for  power  in  some  hours  than  in  others  to 
get  an  equal  distribution  of  the  load  on  their 
plants.  The  Northwestern  Elevated  Railroad, 
under  city  ordinances,  charges  me  5  cents  for 
hauling  me  seven  miles  between  my  home  and 
office  in  Chicago.  It  charges  the  man  who  rides 
only  between  Chicago  Avenue  and  the  Loop,  a  dis- 
tance of  only  a  little  over  a  mile,  the  same  rate. 
The  postal  department,  the  most  public  of  all  pub- 
lic utilities,  charges  the  same  rate  for  carrying 
letters,  newspapers  and  merchandise  from  your 
house  to  a  house  in  the  next  street  as  for  carrying 
them  from  New  York  to  San  Francisco ;  and  many 
favor  the  establishment  of  a  parcels  post,  like 
those  of  foreign  countries,  which  would  carry  an 
eleven-pound  package  from  ocean  to  ocean  as 
cheaply  as  for  a  city  block.  Obviously  these  rates 
are  not  based  on  cost. 

To  say  prices  or  rates  are  based  on  "what  the 
22 


VALUE   OF  THE   SERVICE 

traffic  will  bear,"  or  on  the  value  of  services  or  of 
goods,  is  just  one  way  of  saying  they  are  adjusted 
to  supply  and  demand.  The  packer  charges  a 
lower  price  for  fertilizer  than  for  porterhouse 
steaks ;  the  telegraph  company,  a  lower  rate  for 
night  than  for  day  messages;  the  railway,  lower 
rates  per  ton  per  mile  on  cheap,  competitive,  or 
short-haul  traffic  than  on  valuable,  non-competi- 
tive, or  long-haul  traffic,  to  stimulate  and  enlarge 
the  market  for  the  less  valuable  commodities  and 
services.  They  are,  if  you  please,  by-products, 
the  market's  appetite  for  which  has  to  be  whetted 
and  coaxed  by  low  prices. 

Even  if  the  system  of  basing  prices  and  charges 
largely  on  the  value  of  commodities  or  services 
were  not  used  elsewhere,  its  use  in  the  railway 
business  would  be  necessary  and  justifiable  as  a 
matter  of  public,  as  well  as  of  railway,  policy. 
While  railway  rates  should  be  made  with  constant 
reference  to  cost  of  service,  it  always  has  been, 
and  would  now  be,  utterly  impracticable  to  base 
them  solely,  or  perhaps  even  mainly  on  cost. 
While  it  is  possible  to  make  estimates  of  the  costs 
of  transporting  different  articles  under  different 
conditions  these  estimates  are,  and  must  be,  at 
the  best  only  rough  approximations.  When  they 
are  made  they  vary  extremely  and  with  utter  want 
of  relation  to  commercial  conditions,  even  for  dif- 
ferent parts  of  the  same  railway.  Albert  Fink,  a 
railway  economist  of  the  greatest  authority,  when 

23 


THE    AMERICAN    TRANSPORTATION    QUESTION 

he  was  connected  with  the  Louisville  &  Nashville 
Railroad,  found  that  "under  the  ordinary  circum- 
stances under  which  transportation  service  is  gen- 
erally performed  the  cost  per  ton  per  mile  in  some 
instances  may  not  exceed  ]  of  a  cent,  and  in  oth- 
ers will  be  as  high  as  73  cents  per  ton  per  mile 
on  the  same  road."  '  Would  even  the  most  Quix- 
otic theorist  attempt  to  base  rates  on  costs  vary- 
ing thus?  Costs  per  ton  per  mile  vary  widely  on 
the  same  railway  from  month  to  month,  from 
week  to  week,  and  even  from  day  to  day,  because 
of  variations  in  the  amounts  of  operating  expenses 
and  of  traffic.  Costs  of  transportation  vary  ex- 
tremely on  competing  railways,  on  which  the  rates 
must  be  the  same.  It  is,  therefore,  not  merely  de- 
sirable, but  a  matter  of  absolute  necessity,  that  in 
ratemaking  the  cost  of  the  service  principle  should 
be  supplemented  by,  and  very  often  completely 
subordinated  to,  the  value  of  the  service  principle. 
The  latter's  employment  is  requisite  not  only  to 
the  development  of  a  large  traffic,  but  to  that 
free  circulation  of  all  goods  and  that  development 
of  all  the  country's  natural  resources,  which  are 
essential  to  the  "greatest  good  of  the  greatest 
number. ' ' 

As  I  have  said,  the  three  kinds  of  traffic  on 
which  rates  are  made  less  than  the  average— on 
the  basis  of  additional  rather  than  average  cost — 


Report  of  the  Louisville  &  Nashville  Railroad  for  1874. 
24 


VALUE    OF   THE   SERVICE 

are  low  grade  traffic,  long  distance  traffic  and  com- 
petitive traffic. 

That  the  rates  on  different  commodities  of 
widely  different  values  should  not  be  based  either 
on  the  average  or  on  the  actual  costs  of  the  ser- 
vice is  conceded  by  practically  all  who  have  stud- 
ied the  subject,  even  those  who  contend  that  the 
cost  of  service  principle  ought  usually  to  prevail/ 
A  ton  of  coal  is  worth  at  the  mine,  perhaps,  $1.50. 
A  ton  of  shoes  is  worth  at  the  factory,  perhaps, 
$1,500.  Coal  moves  in  carloads  of  40  tons  or  more; 
therefore,  a  carload  is  worth  about  $60.  Shoes 
move  in  carloads  of  perhaps  10  tons ;  therefore  a 
carload  is  worth  about  $15,000.  There  would  not 
be  much  difference  between  the  direct  costs  of 
hauling  the  carload  of  coal  and  the  carload  of 
shoes.  But  does  it  not  appeal  to  equity  and  com- 
mon sense  that  the  carload  of  coal,  which  is  worth 
$60,  should  be  given  a  lower  rate  per  ton  per  mile, 
or  even  per  car  per  mile,  than  the  carload  of 
shoes,  which  is  worth  $15,000? 

Many  who  concede  that  rates  on  different  com- 
modities should  be  based  on  the  value  of  the  ser- 

'  See  a  very  able  paper  advocating  cost  of  service  rate- 
making  which  was  read  by  Halford  Erickson,  a  member  of 
the  Railroad  Commission  of  Wisconsin,  at  the  twenty-third 
annual  convention  of  the  National  Association  of  Railway 
Commissioners  at  Washington,  D.  C. ,  November  17,  1910 : 
also  Professor  W.  Z.  Ripley's  series  of  articles  on  "Railway 
Rate-Making  in  Practice,"  in  the  Railway  Age  Gazette,  May 
7  to  June  18,  1909. 

25 


THE    AMERICAN    TRANSPORTATION    QUESTION 

vice  deny  that  this  principle  should  be  applied  to 
hauls  of  the  same  commodity  for  different  dis- 
tances. But  much  long-distance  traffic  will  not 
bear  as  high  rates  per  ton  per  mile  as  short  dis- 
tance traffic,  regardless  of  terminal  expenses.  The 
distance  tariff  rate  on  corn  per  100  pounds  for  10 
to  15  miles  in  Illinois  is  3.9  cents.  The  terminal 
expenses  at  origin  and  destination  together  are, 
perhaps,  $6  a  car,  or,  say,  1.06  cents  per  100 
pounds,  leaving  for  a  haul  of  15  miles  2.84  cents 
per  100  pounds  as  the  strictly  transportation 
charge,  or  1.9  mills  per  100  pounds  per  mile. 
That  seems  small;  but  if  you  applied  it  on  a  500 
mile  shipment  it  would  be  95  cents  per  100  pounds, 
allowing  for  no  terminal  expenses  at  all. 

Much  higher  rates  than  any  ever  charged  could 
be  imposed  on  the  more  valuable  commodities 
without  impeding  their  movement  for  even  the 
longest  distances,  unless  competitive  conditions 
intervened.  The  rate  on  a  pair  of  shoes  from  New 
York  to  Chicago  is  about  li  cents.  If  the  rate 
were  raised  200,  or  even  500  per  cent.,  as  many 
shoes  would  be  shipped  as  before.  But  in  prac- 
tice it  is  found  that  for  each  of  a  great  majority 
of  commodities  there  is  some  rate  which  is  the 
very  maximum  that,  regardless  of  distance,  it  can 
pay  and  move.     Says  Professor  W.  Z.  Ripley:' 

'  "Railway  Rate-Makinp:  in  Practice,"  Raihvay  Age  Ga- 
zette, May  7,  1909. 

26 


VALUE   OF   THE   SERVICE 

In  other  words,  suppose  the  traffic  consists  of  grain 
or  coal.  No  more  than  a  certain  amount  could  ever 
be  charged,  no  matter  how  great  the  distance,  with- 
out so  diminishing  the  profit  in  the  transaction  as  to 
render  the  business  impossible.  .  .  .  This  maximum 
varies,  of  course,  with  each  commodity;  on  cotton  it 
may  be  55  cents  per  100  pounds,  on  grain  or  coal  it 
will  be  much  lower,  and  on  cement  or  sand  lower  still. 
The  problem  of  the  traffic  manager  is  to  attain  this 
highest  rate  as  speedily  as  possible  with  increasing 
distance,  and  to  grade  his  rates  with  distance  up  to 
this  level  as  quickly  as  possible,  consistent  of  course 
with  maintenance  of  full  volume  of  business. 

Although  the  traffic,  after  it  has  attained  this 
maximum  rate,  which  is  the  measure  of  the  maxi- 
mum value  of  the  service  of  transporting  it,  will 
bear  no  more,  it  may  be  profitable  to  the  railway, 
on  the  theory  of  additional  cost,  to  haul  it  still 
greater  distances  at  this  same  maximum  rate. 
And  if  the  railway  can  do  this,  it  is  desirable  from 
the  standpoint  of  the  public  that  it  should  do  so. 
As  a  general  principle  it  is  in  the  interest  of  the 
public  welfare  that  rates  shall  be  made  lower  in 
proportion  for  long  than  for  short  hauls.  Rates 
which  are  relatively  low  for  short  hauls  and  high 
for  long  hauls  tend  to  give  the  producers  and  ship- 
pers in  each  community  a  monopoly  of  their  busi- 
ness in  that  community.  On  the  other  hand,  rates 
which  are  relatively  high  for  short  distances,  and 
relatively  low  for  long  distances,  enable  producers 

27 


THE    AMERICAN    TRANSPORTATION    QUICSTION 

to  invade  each  other's  territories;  and  this  stim- 
ulates commercial  and  industrial  competition, 
which,  when  not  carried  to  the  extreme,  promotes 
industrial  efficiency  and  tends  to  keep  down  prices. 
The  shipper  whose  territory  is  invaded  is  pretty 
sure  to  complain  loudly  because  the  rates  of  his 
competitor  are  not  based  on  distance;  but  he  can 
always  offer  a  dozen  reasons— ^good  ones,  too! — 
why  the  rates  he  uses  to  invade  the  territory  of 
his  competitor  should  not  be  based  on  distance. 

The  most  severe  criticisms  of  railway  ratemak- 
ing  are  directed  against  partial  or  complete  disre- 
gard of  cost  of  service  in  fixing  rates  on  competi- 
tive, as  compared  with  non-competitive  traffic. 
Competition  is  either  transportation  or  commercial 
— that  is,  between  either  railways  or  shippers;  in 
many  cases  it  is  both;  and  it  often  justifies  disre- 
gard of  cost  of  service.  Suppose  each  of  two  rail- 
ways reaching  a  certain  market  has  a  coal  mine 
on  it,  one  of  which  is  200  miles  from  the  market, 
and  the  other  only  50  miles.  Here  we  have  both 
transportation  and  commercial  competition.  If 
the  rates  be  based  entirely  on  cost  of  service,  the 
mine  50  miles  distant  will  have  practically  a  mo- 
nopoly of  the  coal  market,  and  the  road  on  which 
it  is  situated  a  monopoly  of  the  transportation  of 
coal.  If  average  cost  of  transportation  be  disre- 
garded, and  only  additional  cost  be  considered, 
and  the  rates  be  so  made  as  to  enable  the  operator 
of  the  mine  200  miles  distant  to  reach  the  market 

28 


VALUE   OF   THE   SERVICE 

— in  other  words,  be  based  on  the  value  of  the  ser- 
vice— the  second  railway  will  get  to  participate  in 
the  coal  traffic  and  derive  some  profit  from  it, 
however  small ;  the  second  coal-mine  owner  will  be 
able  profitably  to  develop  an  otherwise  valueless 
property;  and  the  people  situated  at  the  market 
will  be  able  to  buy  coal  shipped  over  competing 
roads  and  produced  by  competing  coal  operators, 
instead  of  being  obliged  to  deal  with  transporta- 
tion and  coal-producing  monopolies.  Can  there  be 
any  serious  question  as  to  which  method  of  rate- 
making  better  promotes  the  "greatest  good  of  the 
greatest  number?" 

If  the  two  mines  were  located  on  the  same  rail- 
way, we  should  have  merely  commercial  competi- 
tion— that  is,  competition  between  the  two  mine 
operators.  Would  the  railway,  in  that  event,  be 
justified  in  so  adjusting  its  rates  according  to  the 
value  of  the  service,  and  to  some  extent  in  disre- 
gard of  cost,  as  to  enable  both  operators  to  do  busi- 
ness and  the  people  at  the  market  to  buy  from 
either  or  both?  If  the  "greatest  good  of  the 
greatest  number,"  and  not  merely  the  selfish  in- 
terest of  the  man  who  owns  the  nearer  mine,  is  to 
be  considered,  there  can  be  no  doubt  as  to  the 
right  answer.^ 

*  Often  competition  causes  cost  to  be  disregarded  to  such 
an  extent  that  lower  rates  are  made  for  longer  than  for 
shorter  hauls.  Whether  or  not  this  is  ever  justifiable  will 
be  discussed  later. 

29 


Till']    AMERICAN    TRANSPORTATION    QUESTION 

Let  me  give  one  of  the  best  possible  examples 
where  low  rates  were  made  to  develop  traffic 
which  was  at  once  low  grade,  long  distance  and 
competitive,  and  the  results.  Merchandise  for- 
merly was  hauled  to  the  Pacific  Northwest  in  cars 
which  returned  Eastward  empty.  There  was  a 
great  deal  of  timber  in  the  Northwest,  but  it  and 
its  products  were  not  used  to  load  these  cars  East- 
ward because  they  could  not  bear  the  rates  in  ef- 
fect; and  they  could  not  bear  the  rates  because 
they  were  low  grade  traffic,  because  they  met  in 
the  Chicago  and  other  Middle  Western  markets  the 
competition  of  lumber  produced  in  states  farther 
East,  such  as  Michigan,  Minnesota  and  Wisconsin, 
and  because  the  haul  was  very  long.  Mr.  James 
J.  Hill  reasoned  that  the  actual  cost  to  his  road, 
the  Great  Northern,  of  transporting  this  North- 
western lumber  would  be,  not  the  then  average 
cost  per  ton  per  mile  incurred  in  handling  its  ex- 
isting traffic,  but  that,  as  the  cars  had  to  move 
Eastward,  anyway,  it  would  be  the  difference 
between  hauling  them  loaded  and  hauling  them 
empty;  and  that  if  he  could  get  rates,  however 
low,  which  would  more  than  cover  this  difference 
he  would  gain.  The  rates  were  made ;  an  enormous 
lumber  traffic  was  built  up;  and  the  profits  of  the 
transcontinental  roads  were  largely  increased.  As 
the  cost  of  service  theory  deals  with  average,  and 
not  with  additional  cost,  on  that  theory  these  rates 
could  not  have  been  made;  and  the  traffic  could 

30 


VALUE   OF   THE   SERVICE 

not  have  moved.  The  cost  of  service  principle,  as 
commonly  understood,  waits  for  traffic  to  become 
able  to  bear  high  rates;  the  value  of  the  service 
principle  makes  for  traffic  which  cannot  bear  high 
rates,  low  rates  which  it  can  bear. 

What  were  the  effects  on  the  various  concerns, 
persons  and  communities  concerned,  of  the  making 
of  these  low  rates?  The  effect  on  the  railways 
was  to  increase  their  profits.  The  effect  on  the 
Northwestern  lumber  producers  was  greatly  to 
broaden  their  markets,  and  to  enable  them  to  so 
increase  their  expenditures  as  to  promote  the  de- 
velopment of  the  Northwest  along  all  lines.  It  is 
sometimes  said  that  the  effect  of  taking  some 
traffic  at  rates  below  the  average  cost  of  service  is 
to  render  it  necessary  to  make  the  rates  higher  on 
other  traffic  than  would  otherwise  be  necessary. 
But  whatever  margin  there  was  between  the  addi- 
tional expenses  caused  by,  and  the  additional  rev- 
enue derived  from,  the  lumber  traffic  was  just  that 
much  added  to  the  clear  profits  of  the  roads;  and 
whatever  any  certain  traffic  adds  to  profits  must 
tend  to  make  it  practicable  to  reduce,  not  to  make 
it  necessary  to  increase,  the  burden  of  rates  im- 
posed on  other  traffic.  The  effect  on  lumber  con- 
sumers was  to  give  them  a  chance  to  buy  from  an 
increased  number  of  competing  producers  and  to 
postpone  the  day  when  they  would  have  to  pay 
higher  prices.  The  only  persons  who  were  hurt 
by  the  low  rates  were  the  more  Eastern  producers 

31 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  lumber;  and  I  think  it  ought  to  go  without  ar- 
gument that  rates  ought  to  be  adjusted  in  the  in- 
terest of  the  large  body  of  producers  and  consum- 
ers, and  not  in  the  interest  of  the  particular 
producers  who  happen  to  be  located  nearest  the 
markets. 

The  making  of  these  low  rates  had  an  interest- 
ing sequel.  The  price  of  Northwestern  lumber  in- 
creased until  it  averaged  more  than  100  per  cent, 
higher  in  1907  than  in  1894,  when  the  low  rates  on 
it  were  made.  Meantime  the  lumber  traffic  grew 
so  heavy  that  the  empty  car  movement  changed 
from  Eastward  to  Westward.  From  being  the  dif- 
ference between  hauling  the  cars  empty  and  haul- 
ing them  loaded,  the  cost  of  hauling  the  lumber 
became  the  expense  of  sending  cars  empty  all  the 
way  to  the  Pacific  coast  and  hauling  them  back 
loaded.  Both  the  cost  of  the  service  to  the  rail- 
way and  the  value  of  the  service  to  the  shipper 
having  increased,  the  railways  believed  they  were 
justified  in  raising  the  rates,  and  in  November, 
1907,  they  did  advance  them  15  to  20  per  cent. 
The  shippers  appealed  to  the  Interstate  Commerce 
Commission.  The  Commission  upheld  only  part  of 
the  advances.  The  United  States  Circuit  Court, 
to  which  the  railways  appealed  from  the  Commis- 
sion, upheld  practically  all  of  them.  It  seemed  to 
railway  men  that  there  was  ample  justification 
from  the  public  standpoint  both  for  the  making  of 
these  low  rates  on  lumber  and  for  raising  them 

32 


VALUE   OF   THE   SERVICE 

when  they  had  become  disproportionately  low 
as  measured  not  only  by  the  rates  charged  on 
other  commodities,  but  also  by  the  cost  of  the  ser- 
vice and  the  value  of  the  service.' 

Some  able  economists  and  traffic  managers  be- 
lieve that  it  would  be  better  for  the  public  if  rates 
were  made  to  bear  a  more  direct  and  consistent 
relation  to  the  values  of  commodities.  A  railway 
rate  is  not  a  tax,  as  some  have  argued.  It  is  a 
charge,  a  price,  for  a  specific  service.  And  yet 
railway  charges,  and  the  principles  on  which  they 
should  be  made,  resemble,  in  some  ways,  taxes, 
and  the  principles  on  which  they  should  be  levied. 
It  is  an  equitable  rule  of  taxation  that  each  person 
should  be  required  to  contribute  in  proportion  to 
his  ability  toward  the  support  of  the  government; 
and,  these  persons  believe,  it  is  an  equitable  rule 
for  fixing  railway  rates  that,  within  reasonable 
limitations,  each  shipment  or  commodity  should 
be  required  to  contribute  in  proportion  to  its  abil- 
ity to  meeting  the  cost  of  maintaining  and  operat- 
ing the  railway  and  of  paying  a  return  on  the  in- 
vestment in  it.  This  would  mean,  in  a  general 
way,  that  if  $1  was  charged  for  hauling  a  ton  of  a 
commodity  that  was  worth  $20  a  ton,  then,  other 
things   being  equal,  $10  should   be   charged  for 

'  The  next  five  paragraphs  are  from  the  paper  by  the  au- 
thor entitled  "Basic  Principles  of  Rates,"  already  referred 
to,  which  is  used  by  the  La  Salle  Extension  University  in 
its  course  on  interstate  commerce. 

33 


THE    AMERICAN    TRANSPORTATION    QUESTION 

hauling  an  equal  distance,  under  similar  condi- 
tions, a  ton  of  a  commodity  that  was  worth  $200 
a  ton.  In  each  case  the  rate  would  be  5  per  cent, 
of  the  value  of  the  commodity.  If  a  cheap  com- 
modity can  pay  a  rate  that  is  5  per  cent,  of  its 
value,  it  would  seem  that  a  more  valuable  com- 
modity could  equally  afford  to  pay  a  rate  that  is 
5  per  cent,  of  its  value.  Now,  the  railway  traffic 
managers,  in  applying  the  principles  of  charging 
"what  the  traffic  will  bear,"  and  not  charging 
what  it  will  not  bear,  have  done  something  analo- 
gous to  this.  They  have  made  dry  goods  pay  more 
than  coal;  boots  and  shoes  more  than  stone; 
because  dry  goods,  boots  and  shoes,  owing  to  their 
greater  value,  can  afford  to  pay  more. 

But  the  principle  has  not  been  carried  out  con- 
sistently. Freight  rates  are  almost  uniformly 
higher  in  proportion  to  the  value  of  cheap  com- 
modities than  in  proportion  to  the  value  of  valua- 
ble commodities.  The  total  cost  of  the  transpor- 
tation of  the  wool  in  a  $35  suit  of  clothes  from 
the  back  of  a  sheep  to  the  back  of  a  man  is  per- 
haps 7  or  8  cents,  while  the  domestic  rate  on  a 
bushel  of  wheat  from  Chicago  to  New  York  is  11^ 
cents.  The  cost  of  transportation  is  J  of  the  value 
of  the  wheat,  and  only  ^U  or  ^U  of  the  value  of 
the  suit.  Now,  generally  speaking,  the  so-called 
"masses"  are  the  largest  consumers,  proportion- 
ately, of  cheap,  bulky  commodities,  while  the 
so-called    "classes"    are    the    largest  consumers, 

34 


VALUE   OF   THE   SERVICE 

proportionately,  of  the  more  valuable  articles. 
Consequently,  a  rate  system  that  applies  higher 
rates,  proportionately,  to  cheap  than  to  expensive 
articles,  tends  to  place  a  greater  burden,  propor- 
tionately, on  the  poor  than  on  the  more  prosper- 
ous. Regardless  of  whether  present  freight  rates 
are,  on  the  average,  too  high  or  too  low,  it  would 
seem  that,  for  social  reasons  the  railways  should 
be  encouraged  to  make  their  rates  higher  on  the 
more  valuable  than  on  the  cheaper  commodities, 
on  the  same  principle  that  in  taxation  we  tax  lux- 
uries higher  than  we  tax  necessaries. 

The  more  one  studies  ratemaking  the  more  he  is 
impressed  with  the  fact  that,  broadly  speaking, 
the  railway  traffic  manager  does  not  arbitrarily 
make  rates,  but  to  a  large  extent,  is  merely  the 
agent  of  transportation,  industrial  and  commercial 
conditions  in  adjusting  them.  The  seeming,  or 
real,  inconsistencies,  anomalies  and  injustices  that 
we  frequently  meet  in  classifications  and  schedules 
are  mainly  due  to  this  cause. 

The  student  of  biology  knows  that  in  every  ani- 
mal organism  there  survive  numerous  atrophied 
parts  which  formerly  served  highly  useful  pur- 
poses, but,  which,  owing  to  changes  of  the  envi- 
ronment in  which  the  animal  lives  and  gains  its 
subsistence,  have  ceased  to  be  of  value,  or,  like 
the  human  vermiform  appendix,  have  become  even 
a  chronic  source  of  danger.  The  student  of  juris- 
prudence knows  that  in  every  branch  of  his  sci- 

35 


THE    AMERICAN    TRANSPORTATION    QUESTION 

ence  there  survive  rules  of  substantive  or  adjec- 
tive lav/  handed  down,  perhaps,  from  the  period 
of  feudalism,  many  of  which  are  ill-adapted  to 
modern  conditions,  and  others  of  which  demand 
excision  by  the  lawmakers.  Similarly,  the  student 
of  railway  ratemaking  and  railway  economics  of- 
ten finds  rate  adjustments  that  seem  ill-adapted  to 
industrial  and  commercial  conditions,  or  positively 
unjust;  and  he  may  be  disposed  at  first  to  denounce 
railway  managers  for  making  such  rates.  But  if 
he  will  study  the  adjustment  carefully  he  may  find 
that  when  it  was  first  made  it  was  admirably 
adapted,  like  some  of  the  feudal  rules  of  law  which 
I  just  mentioned,  to  the  conditions  that  then  ex- 
isted. He  also  may  find,  as  students  of  jurispru- 
dence often  do,  that  the  thing  he  at  first  con- 
demned is  not  nearly  so  ill-adapted  to  existing 
conditions  as  at  first  he  thought.  And  if  he  pur- 
sues the  matter  far  enough  he  may  find,  as  many 
who  have  set  out  to  reform  parts  of  our  jurispru- 
dence have  found,  that  the  thing  he  criticises  is  so 
bound  up  with  other  things  of  vital  importance 
and  value  that  it  cannot  be  eradicated  without  do- 
ing a  great  deal  more  indirect  harm  than  direct 
good.  This  explains  why  traffic  managers  often 
are  very  slow  or  reluctant  to  make  changes  that  to 
the  lay  mind  seem  clearly  fair  and  desirable. 

Then,  sometimes  changing  conditions  force  the 
traffic  managers  to  abandon  old  adjustments  of 
rates,  just  as  changing  conditions  often  force  the 

36 


VALUE   OF  THE   SERVICE 

most  conservative  courts  to  abandon  old  precedents 
or  make  new  ones.  Some  years  ago  the  manufac- 
turers of  cotton  piece  goods  in  Nev/  England  ap- 
pealed to  the  railways  in  that  section  to  make 
them  lower  rates  to  the  West.  They  pointed  out 
that  they  had  to  pay  for  the  transportation  of  raw 
cotton  the  long  distance  from  the  South  to  New 
England,  as  well  as  for  the  transportation  of  cot- 
ton goods  from  their  mills  to  the  West,  while  com- 
peting manufacturers  in  the  South  had  only  a  rela- 
tively small  rate  to  pay  for  the  transportation  of 
raw  cotton  to  the  mills.  The  consequence,  the 
Eastern  manufacturers  said,  was  that  they  were 
gradually  becoming  unable  to  meet  in  Western 
markets  the  competition  of  their  Southern  rivals. 

When  the  Eastern  roads  hesitated  about  making 
the  reductions  asked  for  the  New  England  manu- 
facturers said  that  unless  they  were  made  they 
would  have  to  move  their  factories  to  the  South. 
The  Eastern  roads  then  made  the  desired  reduc- 
tions. Now,  you  might  say  that  the  traffic  mana- 
gers did  not  have  to  make  the  lower  rates.  But 
probably  they  had  either  to  make  them  or  lose  a 
large  amount  of  traffic.  And  that  is  the  kind  of 
situation  that  confronts  the  traffic  manager  every 
day.  He  is  seeking  to  get  the  largest  possible 
traffic  and  earnings  for  his  own  road.  But  to  do 
that  he  has  got  to  adjust  his  rates  just  as  perfectly 
as  possible  to  the  conditions  created  by  the  past 
and  present  competition  of  railways,  waterways, 
4  37 

107889 


THE    AMERICAN    TRANSPORTATION    QUESTION 

producing  centers  and  markets.  He  may  charge 
all  the  traffic  will  bear;  but  he  is  very  careful  not 
to  charge  more  than  it  will  bear;  and  how  much  it 
will  bear  is  always  determined  by  circumstances 
many  of  which  are  entirely  beyond  the  control  of 
any  man  or  set  of  men. 

If  my  reasoning  is  not  entirely  wrong,  rates 
cannot  be,  or  at  least  ought  not  to  be,  based 
wholly  on  either  the  cost  of  the  service  to  the  rail- 
way or  its  value  to  the  shipper.  They  must  be,  or 
at  least  should  be,  based  on  both.  They  cannot 
be,  or  at  least  should  not  be,  based  wholly  on  the 
actual  or  the  average  cost  of  the  service,  because 
they  would  obstruct  or  prevent  the  movement  of  a 
great  deal  of  traffic  which,  from  the  social  point 
of  view,  it  is  desirable  shall  move.'  They  should 
not  be  based  wholly  on  the  value  of  the  service, 
because  if  they  were  some  traffic  would  be  charged 
less  than  the  additional  cost  of  handling  it;  and 

'  We  may  perhaps  assume  that  the  average  cost  per  ton 
per  mile,  including  all  operating  expenses,  taxes  and  return 
on  stock  and  bonds  is  7.53  mills,  which  is  the  average  rate 
per  ton  per  mile  in  the  United  States.  Suppose  we  should 
abolish  all  the  existing  complicated  classifications  and  tar- 
iffs and  begin  to  charge  a  flat  rate  on  all  commodities  of 
7.53  mills  per  ton  per  mile.  We  would  then  have  rates 
based  absolutely  on  distance  and  average  total  cost  of  ser- 
vice. Millions  of  tons  of  ore,  coal,  stone,  etc.,  are  hauled 
each  year  for  3§  to  4  mills  per  ton  per  mile.  It  cannot  be 
assumed  that  they  can  bear  a  higher  rate ;  if  they  could  the 
carriers  would  hardly  make  on  them  a  rate  so  much  below 
the  average.     The  first  eflfect,  therefore,  of  the  application 

38 


VALUE   OF   THE   SERVICE 

some  traffic  might  be  charged  more  than  it  ought 
to  be  required  to  pay.  For  example,  the  rate  on  a 
suit  of  clothes  for  a  thousand  miles  may  be  6  cents. 
If,  instead,  the  rate  were  60  cents  it  would  not  ex- 
ceed the  value  of  the  service  and  the  clothes  would 
be  shipped.  The  fact  that  the  rates  on  the  more 
valuable  goods  are  so  small  in  proportion  to  their 
value,  and  that  an  advance  of  10,  or  100,  or  even 
1,000  per  cent,  in  them  probably  would  not  hinder 
the  movement  of  the  traffic  is  sometimes  used  as 
an  argument  in  favor  of  higher  rates.  Within  cer- 
tain limitations,  and  under  certain  conditions,  it 
is  a  valid  argument.  If,  in  order  that  the  rail- 
ways might  continue  to  give  good,  improving  and 
increasing  service  it  were  necessary  that  the  rate 
on  a  suit  of  clothes  be  even  60  cents  and  that  the 
rates  on  other  valuable  commodities  be  proportion- 
ately high,  it  would  be  best  for  the  public  to  per- 
mit the  roads  to  charge  them.    But  no  matter  how 

to  all  traffic  of  a  rate  based  on  average  total  cost  would  be 
that  an  enormous  amount  of  this  low  grade  traffic  would 
quit  moving.  The  resulting  slump  in  earnings  would  neces- 
sitate an  increase  in  the  rate.  This  would  make  it  too  high 
for  another  large  quantity  of  relatively  low  grade  traffic, 
and  there  would  be  another  slump  in  business  and  earnings 
which  would  necessitate  another  increase  in  the  average 
rate.  The  ultimate  result,  it  would  seem,  would  be  that  the 
rate  would  become  so  high  that  only  the  higher  classes,  or 
even  the  highest  class,  of  commodities  could  move.  Much 
the  same  effect  would  be  caused  by  trying  to  base  rates 
on  actual  total  cost,  as  distinguished  from  avei-age  total 
cost. 

39 


THE    AMERICAN    TRANSPORTATION    QUESTION 

small  in  proportion  to  the  value  of  goods  a  rate 
may  be,  and  how  little  a  raise  in  it  would  affect 
the  movement  of  the  traffic,  the  rate  comes  out  of 
somebody's  pocket,  and  therefore  if  the  traffic  is 
already  paying  the  average  total  cost  of  transpor- 
tation or  more  there  can  be  no  justification  for  ad- 
vancing the  rate,  unless  such  advance  is  needed  to 
enable  the  railway  to  earn  enough  to  continue  to 
exist  and  to  give  the  public  good,  improving  and 
increasing  service. 

The  foregoing  considerations  regarding  the  ap- 
plication of  the  cost-of-the-service  and  the  value- 
of-the-service  principles  suggest  two  vitally  im- 
portant points.  The  first  is,  that  there  must  be 
discrimination  in  rates;  and  it  is  necessary  to  de- 
termine when  in  the  application  of  these  basic 
principles  fair,  and  when  unfair,  discrimination 
results,  and  how  unfair  discrimination  may  be 
prevented.  The  second  point  relates  to  the  ques- 
tion of  what  return  railways  should  and  must  be 
allowed  to  have  in  order  that  they  may  give  good 
and  adequate  service.  We  know  that  in  the  past 
the  application — or  misapplication — of  these  un- 
derlying principles  has  resulted  in  many  unfair 
discriminations.  We  know  that  it  is  essential,  in 
order  to  have  good  and  adequate  transportation, 
that  the  railways  be  able  to  earn  their  operating 
expenses  and  such  interest  and  dividends  on  their 
bonds  and  stocks  as  will  make  the  railroad  business 
attractive  to  investors;  proper  interest  and  divi- 

40 


VALUE   OF   THE   SERVICE 

dends  as  well  as  operating  expenses  and  taxes  be- 
ing factors  in  the  entire  cost  of  transportation 
which  must  be  incurred  and  met.  It  is  much  eas- 
ier to  state  the  basic  principles  than  it  is  to  deter- 
mine what  is  unfair  discrimination,  and  when  and 
where  it  has  taken  place  and  is  taking  place;  or 
than  to  determine  what  is  the  return  that  railways 
should  and  must  be  allowed  to  earn,  on  what  basis 
it  should  be  computed,  and  what  railways  are  now 
earning,  and  what,  if  any,  are  not  earning,  this 
desirable  and  necessary  return.  I  shall  take  up 
the  question  of  discrimination  in  the  next  chap- 
ter, and  shall  later  discuss  the  questions  of  rail- 
way valuation  and  financial  return. 


CHAPTER  III 

DISCRIMINATION    BETWEEN   COMMODITIES   AND 
COMMUNITIES 

In  the  consideration  of  many  subjects  differen- 
tiation and  definition  should  precede  discussion. 
This  is  conspicuously  true  of  railroad  discrimina- 
tion. Many  persons  condemn  railroad  discrimina- 
tion as  if  it  were  essentially  wrong.  They  over- 
look the  fact  that  in  all  thinking  and  affairs  there 
are  at  least  two  kinds  of  discrimination.  In  one 
sense,  to  discriminate  is  to  "set  apart  as  being 
different,"  to  "distinguish  accurately";  in  an- 
other, it  is  to  "treat  unequally."  When  we  call  a 
man  "discriminating"  in  taste  or  conduct  we  do 
not  dispraise,  but  praise  him.  Only  when  we  say 
he  discriminates,  meaning  that  he  "treats  un- 
equally,"^ do  we  condemn  him.  Now,  this  dis- 
tinction holds  in  railway  as  in  other  matters.  You 
could  no  more  have  satisfactory  rates  and  trans- 
portation without  the  discrimination  that  "sets 
apart  things  which  are  different"  than  without  it 
you  could  have  philosophy,  or  friendships,  or 
statesmanship,  or  industry,  or  commerce.    Entirely 


'  See  an  article  by  E.  P.  Ripley  in  the  Atlantic  Monthly 
for  January,  1911. 

42 


DISCRIMINATION 

undiscriminating  rates  and  service  would  be  most 
unfair  and  intolerable.  The  important  question, 
then,  as  to  railway  rates  and  railway  services  is 
not  whether  they  discriminate,  but  whether,  when 
they  do,  they  do  so  fairly  or  unfairly— whether 
they  ''distinguish  accurately"  or  ''treat  un- 
equally." 

Many  consider  railway  discrimination  something 
fundamentally  different  from  discrimination  in 
other  businesses.  Merchants  and  manufacturers 
"lay  the  flattering  unction  to  their  souls"  that  it 
is  wrong  for  the  railway  to  publish  a  schedule  of 
rates  and  secretly  depart  from  it  for  favored  ship- 
pers, but  right  for  the  manufacturer  or  merchant 
to  publish  price  lists  and  depart  from  them  for 
favored  customers.  But  the  difference  between 
railroad  discrimination  and  discrimination  in  other 
businesses,  it  would  seem,  is  mainly  legal,  not 
ethical.  Understand,  I  do  not  say  it  is  morally  as 
right  for  the  railway  to  discriminate  as  for  the 
manufacturer;  but  merely  that  it  is  morally  as 
wrong  for  the  manufacturer  unfairly  to  discrim- 
inate as  for  the  railway.  Under  the  common  law 
even  the  legal  distinction  was  not  made.  Unfair 
discrimination  has  nothing  to  do  with  the  absolute 
amount  of  rates;  it  is  an  inequitable  relation  be- 
tween them.  Now,  under  the  common  law  such 
a  relation  was  not  illegal.  All  the  common  law 
required  was  that  a  rate  should  not  be  excessive. 
If  it  was  not,  a  shipper  would  not  be  heard  by  the 

43 


TIIK    AMKRICAN    TRANSPORTATION    QUESTION 

courts  to  complain  that  some  one  else  got  a  lower 
rate. 

It  may  be  said  that  the  railway's  service  being 
legally  public  imposes  a  special  moral  obligation 
not  arbitrarily  to  discriminate.  But  if  an  act  is 
immoral,  laws  punishing  it  do  not  make  it  more 
so.  Manufacturers  enjoying  the  benefits  of  a 
protective  tariff  are  thereby  as  much  obligated 
morally  to  deal  fairly  as  are  railways  exercising 
the  power  of  eminent  domain.  A  more  closely 
analogous  case  is  that  of  water-carriers.  They 
use  navigable  highways  owned,  developed  and 
maintained  by  the  public.  They  exercise  the 
power  of  eminent  domain  to  get  land  for  wharfs, 
etc.  The  public  has  the  same  legal  power  to  regu- 
late their  charges  as  those  of  railways,  and  they 
owe  it  as  high  a  duty.  Yet  we  let  boat  owners, 
even  on  our  coastwise  and  inland  waterways, 
where  they  compete  directly  with  railways,  dis- 
criminate as  they  please  as  to  all  traffic  but  that 
moving  partly  by  water  and  partly  by  rail;  and 
they  use  the  privilege  to  the  fullest  extent. 

Often  an  economic  distinction  is  drawn  between 
railways  and  other  concerns,  based  on  the  idea 
that  competition  regulates  prices  in  other  indus- 
tries, while  each  railway  is  practically  a  monopoly 
where  it  :s  the  only  line,  and  practically  a  trans- 
portation monopoly  exists  at  other  places  where 
community  of  interest  arrangements  and  consoli- 
dations have  eliminated  active  competition.     The 

44 


DISCRIMINATION 

monopolistic  nature  of  the  railway  does  give  the 
government  a  special  right  and  duty  to  regulate 
its  charges.  But  I  am  unable  to  see  much  economic 
difference  between  the  act  or  effect  of  arbitrary 
discrimination  by  a  railway  monopoly  and  by  an 
industrial  monopoly,  such  as  some  of  the  great 
American  "trusts,"  which  have  got  as  complete 
control  of  prices  as  any  railway  combination  ever 
got  of  rates. 

This  parallel  between  discrimination  in  the  rail- 
way and  in  other  fields  has  not  been  introduced  in 
defense  of  unfair  railway  discrimination.  It  has 
been  the  most  pervasive  and  pernicious  abuse  that 
ever  developed  in  the  railway  business.  No  ef- 
forts should  be  spared  to  extirpate  it.  But  there 
has  been,  perhaps,  too  much  tendency  to  single  it 
out  as  something  so  peculiarly  odious  and  harmful 
as  to  merit  peculiar  obloquy  as  well  as  peculiar 
punishment.  Our  aim  should  be  to  get  all  kinds 
of  business  on  a  higher  moral  plane.  We  can  get 
the  railway  business  on  a  higher  plane  by  public 
regulation  and  by  training  and  keeping  trained 
on  it  an  intelligent  and  militant  public  opinion. 
About  the  only  effective  means  we  have  as  yet 
found  for  raising  other  businesses  to  a  higher 
moral  level  is  the  creating  and  applying  to  them 
of  a  discriminating  and  exacting  public  sentiment; 
and  we  do  less  than  justice  to  railway  managers 
and  owners,  and  interpose  a  formidable  obstacle 
to  the  reform  of  other  businesses,  when  we  con- 

45 


THI-]    AMERICAN    TRANSPORTATION    QUESTION 

demn  and  punish  in  the  railway  business,  what 
we  permit,  condone  and  even  foster,  elsewhere. 

The  distinction  between  fair  and  unfair  railway 
discrimination  is  clearly  recognized  by  the  law. 
The  Act  to  Regulate  Commerce*  defines  unjust  dis- 
crimination as  charging  or  receiving  from  one  a 
greater  or  less  compensation  for  any  service  than 
is  charged  or  received  from  another  for  a  "like  or 
contemporaneous  service  in  the  transportation  of  a 
like  kind  of  traffic  under  substantially  similar  cir- 
cumstances and  conditions."  Elsewhere ^  it  is  de- 
fined as  "any  undue  or  unreasonable  preference  or 
advantage  to  any  particular  person,  company,  firm, 
corporation  or  locality,  or  any  particular  descrip- 
tion of  traffic."  When  traffic  is  not  "of  a  like 
kind,"  or  the  circumstances  and  conditions  of 
transportation  are  not  substantially  similar,  or  no 
undue  or  unreasonable  preference  or  advantage  is 
given,  discrimination  is  proper  and  legal. 

But  what  are  "like  kinds  of  traffic"?  When  are 
"circumstances  and  conditions  substantially  simi- 
lar"? When  is  an  "undue  or  unreasonable  prefer- 
ence or  advantage"  given?  The  standards  to  be 
applied  are  the  fundamental  principles  of  correct 
ratemaking — that  is,  what  it  costs  the  railway  to 
render  the  services,  and  what  are  their  relative 
values.  Silk  and  sand  are  not  a  "like  kind  of 
traffic,"  and  are  not  hauled  under  "substantially 

'  Section  two.  -  Section  three. 

46 


DISCRIMINATION 

similar  circumstances  and  conditions."  As  silk  is 
much  the  more  valuable,  the  value  of  the  service 
of  hauling  it  is  greater;  and  as  it  moves  in  smaller 
carlots  and  on  faster  trains,  and  there  is  more  risk 
in  handling  it,  its  transportation  costs  more.  The 
circumstances  and  conditions  of  the  transportation 
of  goods  from  New  York  to  Spokane,  Washington, 
an  inland  city,  and  to  Seattle,  which  is  on  an  arm 
of  the  sea,  are  not,  the  Supreme  Court  of  the 
United  States  has  held,  substantially  similar. 
There  is  cheap  water  transportation  at  Seattle. 
There  is  not  at  Spokane.  Therefore  the  value  of 
the  railway  service  to  the  shipper  at  Seattle  is 
limited  by  what  he  can  bring  his  goods  in  for  by 
water,  while  its  value  to  the  shipper  at  Spokane  is 
not  thus  limited. 

Of  course,  ultimately  all  discriminations  are  be- 
tween shippers  or  consignees;  but  for  convenience 
they  may  be  divided  into  discriminations  (1)  be- 
tween commodities,  (2)  between  localities,  and  (3) 
between  persons. 

All  classification  is  discrimination.  It  is  the 
segregation  of  things,  which,  from  the  special 
viewpoint  of  the  classifier,  are  different,  and  the 
grouping  of  things,  which,  from  his  viewpoint, 
are  similar.  As  I  have  said  in  another  chapter, 
railway  classifications  divide  commodities  into 
from  6  to  10  groups  having  different  rates.  There 
are  also  many  "commodity  rates"  which  are  ex- 
ceptions to,  and  lower  than,  the  class  rates. 

47 


TlIK    AMERICAN    TRANSPORTATION    QUESTION 

Some  commodities  are  competitive  with  each 
other;  most  are  not.  Competition  between  com- 
modities affects  classification  and  ratemaking  be- 
cause the  adjustment  of  rates  may  deteiTtiine 
whether  one  commodity  shall  be  substituted  for 
another,  or  whether  one  or  both  shall  be  produced. 
In  one  case  before  the  Interstate  Commerce  Com- 
mission '  the  question  was  whether  the  railways 
were  justified  in  charging  between  New  York  City 
and  Atlanta,  Georgia,  a  rate  of  33  cents  per  100 
pounds  on  common  soap  and  one  of  73  cents  on 
Pearline.  It  was  shown  that  the  two  commodities 
were  competitive  in  that  they  could  be  substituted 
for  each  other,  and  that  the  difference  in  the  costs 
of  transporting  them  did  not  alone  justify  the  dif- 
ference in  the  rates.  It  was  also  shown  that 
Pearline  was  about  twice  as  valuable  as  common 
soap,  and  that  common  soap  moved  by  water  as 
far  as  Savannah,  Georgia,  while  Pearline,  owing 
to  its  susceptibility  to  dampness,  could  not  move 
by  water.  The  Commission  held  that  the  dispar- 
ity between  the  two  rates  was  too  wide,  but  that 
"the  very  great  difference  in  the  value,  and  also 
the  risk  in  case  of  serious  accident  in  the  trans- 
portation of  Pearline  as  compared  with  common 
soap,  would  seem  to  indicate  that  there  is  ground 
for  a  reasonable  difference  in  the  freight  rates  on 

•J as.  Pyle  &  Sons  vs.  E.  Tenn.,  Va.  &  Ga.  R.R.  Co.,  1 
I.  C.  C.  Rep.,  465. 

48 


DISCRIMINATION 

these  two  articles";  and  it  ordered  a  rate  of  60 
cents  on  Pearline,  which  was  almost  double  that 
on  soap.  The  differential  was  based  almost  not  at 
all  on  the  difference  in  the  costs  of  the  services, 
which  was  small,  but  almost  entirely  on  the  dif- 
ference in  the  values  of  the  services,  which  was 
large. 

Some  of  the  best  illustrations  of  discrimina- 
tions, both  fair  and  unfair,  between  commodities 
are  afforded  by  the  rates  on  raw  materials  and 
their  products;  for  example,  on  wheat  and  flour, 
corn  and  corn-meal,  live  stock  and  packing-house 
products.  Both  the  cost  and  the  value  of  hauling 
corn-meal  are  greater  than  those  of  hauling  corn. 
Therefore,  the  Interstate  Commerce  Commission 
in  one  case'  allowed  a  differential  of  3  cents  per 
100  pounds  between  the  rates  on  them  from  the 
Missouri  River  to  points  in  Texas,  and  in  another 
case^  one  of  5  cents  between  the  rates  on  them 
from  the  Missouri  River  to  the  Pacific  coast.  The 
competitive  relation  between  grain  and  its  prod- 
ucts is  such  that  if  the  rate  on  flour,  for  example, 
be  made  higher  than  that  on  wheat  the  tendency 
will  be  to  concentrate  the  milling  industry  near 
large  consuming  markets;  if  the  rate  on  wheat  be 
made  the  higher  the  tendency  will  be  to  relegate 
milling  to  the  wheat-growing  sections;  while  if 
the  rates  be  the  same,  or  substantially  the  same, 

>11  I.  C.  C.  Rep..  220.  2 il  I.  C.  C.  Rep..  212. 

49       . 


TIIR    AMERICAN    TRANSPORTATION    QUESTION 

the  millers  at  all  points  will  be  put  practically  on 
a  parity.  Competition  between  the  millers  and 
the  railways  serving  them  has  caused  the  rates  on 
grain  and  its  products  to  be  usually  made  the 
same.  The  social  advantages  of  having  them  so 
adjusted  as  to  put  the  millers  at  different  points 
on  a  substantial  parity  justify,  from  the  public 
standpoint,  the  disregard,  to  this  extent,  of  the 
cost  and  the  value  of  the  service.  In  some  cases 
competition  has  caused  the  rates  on  grain  products 
to  be  made  lower  than  on  grain.  It  is  hard  to  de- 
fend such  an  adjustment  on  any  ground  except  that 
it  is  the  policy  of  our  law  to  foster  extreme  rail- 
way competition,  and  that  this  is  one  of  its  results. 
Some  of  the  best  examples  of  unjust  discrimina- 
tion between  both  competitive  and  non-competitive 
commodities  are  to  be  found  in  the  rates  on  live 
stock  and  packing-house  products.  The  Interstate 
Commerce  Commission  once  estimated  the  value 
per  100  pounds  of  live  hogs  at  from  $4.50  to  $4.75, 
and  of  dressed  pork  at  $7.50.  The  values  of  both 
are  greater  now,  but  the  relation  is  about  the 
same.  In  one  case^  the  Commission,  basing  its 
findings  on  the  testimony  of  railway  experts,  held 
that  the  cost  of  hauling  packing-house  products 
was  the  greater.  In  the  same  case,  on  the  basis 
of  the  same  testimony,  of  the  same  experts,  the 


'  Chicago  Live  Stock  Exchange  vs.  C.  G.  W.  Ry.  Co.  et 
al..  10  I.  C.  C.  Rep..  428. 

50 


DISCRIMINATION 

courts  held  that  the  cost  of  hauling  live  stock  was 
the  greater.  This  illustrates  the  difficulty  some- 
times met  in  finding  out  what  is  the  cost  of  trans- 
portation! The  case  mentioned  grew  out  of  the 
Chicago  Great  Western's  having  reduced  the  pro- 
portional rate  on  packing-house  products  from  the 
Missouri  River  to  Chicago  from  2Sh  to  18J  cents  in 
consideration  of  a  contract  with  the  packers  on 
the  Missouri  River,  under  which  it  was  to  be  given 
a  stipulated  part  of  their  business  for  seven  years. 
There  being  no  corresponding  reduction  made  in 
the  rate  on  live  stock,  this  made  the  packing-house 
products  rate  substantially  lower  than  the  live 
stock  rate,  which  tended  to  cause  live  stock  to  be 
killed  at  the  packing  houses  on  the  Missouri  River, 
rather  than  in  Chicago.  The  Chicago  Live  Stock 
Exchange  complained  that  this  was  an  unfair  dis- 
crimination against  the  live  stock  traffic  and 
against  the  Chicago  market.  The  Interstate  Com- 
merce Commission  upheld  it.  "The  value  of  the 
article  is  important,"  said  the  Commission,  "prin- 
cipally because  of  its  bearing  upon  the  value  to  the 
siiipper  of  the  transportation  service;  and  the 
value  of  the  service  is,  and  has  always  been,  con- 
sidered by  carriers  one  of  the  important  elements 
to  be  considered  when  fixing  rates  to  be  charged 
for  transportation." 
The  Supreme  Court  ^  overruled  the  Commission, 

•  I.  C.  C.  vs.  C.  G.  W.  Ry.  Co.  et  at,  209  U.  S.,  106, 
51 


THE    AMERICAN    TRANSPORTATION    QUESTION 

holding  that  the  rates  were  the  direct  result  of 
competition  between  the  carriers;  that  they  had 
not  changed  the  volume  of  traffic  to  Chicago;  and 
that  therefore  an  unlawful  discrimination  was  not 
proved.  Not  one  railway  traffic  officer  or  econo- 
mist in  a  hundred  would  dispute  that  the  rate 
principles  stated  by  the  Commission  were  correct, 
and  that  the  making  of  the  lower  rates  on  packing- 
house products  was  economically  unjustifiable. 
But  so  long  as  it  is  the  policy  of  our  law  to  compel 
unrestricted  competition  between  railways,  the 
courts  cannot  be  blamed  for  straining  a  point  to 
uphold  rates  directly  resulting  from  that  competi- 
tion. This  low  rate  on  packing-house  products 
was  not  merely  unfairly  discriminatory  as  com- 
pared with  the  rates  on  live  stock.  It  was  un- 
fairly low  as  compared  with  practically  every 
other  rate  of  the  railways  making  it.  For  exam- 
ple, the  rate  on  mixed  carloads  of  dressed  poultry 
and  eggs  from  the  Missouri  River  to  Chicago  was 
45  cents,  or  150  per  cent,  higher.  Most  of  the 
railways  recognized  that  it  was  at  once  so  unfairly 
low  as  compared  with  the  rates  on  other  commodi- 
ties, and  so  unremunerative  because  of  the  expen- 
sive service  given  for  it,  that  in  1910  all  but  two 
raised  it  back  from  18i  to  23|  cents.  It  is  still  in 
effect  on  these  two. 

It  has  been  said  by  the  Commission  and  the 
courts  that  where  the  competitive  relation  between 
two  commodities,  such  as  flour  and  silk,  is  very 

52 


DISCRIMINATION 

remote  they  will  not  disturb  a  rate  on  one  because 
it  is  relatively  very  high  or  very  low  compared 
with  the  rate  on  the  other.  But  the  rates  on  all 
commodities  should  be  adjusted  with  reasonable 
reference  to  the  costs  and  values  of  the  services  of 
hauling  them.  If  the  rate  on  one  is  made  unrea- 
sonably low,  measured  by  these  standards,  as  was 
and  is  done  in  the  case  of  packing-house  products, 
either  (1)  the  carrier  does  not  earn  as  much  from 
its  whole  business  as  it  is  entitled  to,  or  (2)  some 
traffic  is  charged  disproportionately  high  rates  to 
offset  the  disproportionately  low  rates  accepted  on 
other  traffic.  In  the  one  case,  the  stockholders  of 
the  railway  suffer;  in  the  other,  the  shippers  that 
are  charged  too  much  suffer. 

The  second  class  of  discriminations  I  have 
mentioned— those  between  localities — have  been, 
especially  in  recent  years,  the  subject  of  bitter 
complaints  and  endless  controversies.  An  analysis 
of  all  the  species  would  alone  require  a  good-sized 
volume ;  I  shall  have  to  confine  myself  to  a  very 
few  genera. 

Rates  in  some  parts  of  the  country  are  higher 
than  in  others.  The  people  of  the  sections  where 
they  are  comparatively  high  often  contrast  their 
rates  unfavorably  with  those  of  sections  where 
they  are  comparatively  low.  The  fact  that  the 
rates  of  one  section  are  higher  than  those  of  an- 
other is  not,  however,  proof,  or  even  prima  facie 
evidence,  of  unfair  discrimination.  The  railways 
5  f^3 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  some  sections  are  built  and  operated  through 
mountains  where  the  costs  of  construction,  main- 
tenance and  operation  are  high;  in  other  sections 
they  are  built  and  operated  across  prairies,  where 
construction,  maintenance  and  operation  are  com- 
paratively inexpensive.  These  differences  in  the 
costs  of  service  justify  differences  in  the  rates. 
Again,  the  traffic  in  some  sections  is  much  denser 
than  in  others.  The  Interstate  Commerce  Com- 
mission divides  the  railways  of  the  United  States 
into  10  territorial  groups.  In  group  2,  including 
New  York,  New  Jersey,  most  of  Pennsylvania, 
and  part  of  Maryland,  the  railways  had,  in  1909,  a 
freight  density  of  2,451,841  tons  hauled  one  mile 
per  mile  of  line,  and  a  passenger  density  of  290,- 
023  passengers  hauled  one  mile  per  mile  of  line. 
In  group  9,  including  Louisiana  and  Texas  and  a 
part  of  New  Mexico,  the  density  of  traffic  was  but 
411,357  ton  miles  and  67,097  passenger  miles,  ^  or 
less  than  one-fifth  of  what  it  was  in  group  2. 
Even  in  group  6,  including  Illinois,  Wisconsin, 
Iowa  and  Minnesota,  and  parts  of  Missouri,  Michi- 
gan, South  Dakota  and  North  Dakota,  the  density 
was  less  than  one-third  that  of  group  2.  The  less 
the  density  of  traffic  the  more  it  costs  to  haul  each 
unit  of  traffic,  and  the  higher  the  rates  properly 
may  and,  indeed,  must  be.  Comparisons  of  rates 
in  different  sections  mislead  unless  they  take  into 

'  "Statistics  of  Railways  in  the  United  States,"  1909. 
54 


DISCRIMINATION 

account  these  dissimilarities  in  the  "circumstances 
and  conditions"  of  transportation.  If,  however, 
these  dissimilarities  be  allowed  for,  comparison  of 
the  rates  of  one  section  with  those  of  others  is  a 
good  test  of  their  reasonableness. 

In  other  cases  communities  complain  that  part 
of  their  rates  are  high  compared  with  the  rates  on 
the  same  commodities  in  other  sections.  When 
the  entire  schedules  of  rates  of  such  communities, 
including  those  on  both  inbound  and  outbound 
traffic,  are  scrutinized  it  may  be  found  that  while 
part  of  their  rates  are  relatively  high,  part  are  rel- 
atively low.  For  example,  there  has  been  much 
complaint  that  the  rates  from  the  East  to  places 
between  the  Rocky  and  Sierra  Nevada  Mountains 
are  excessive.  But  examination  of  the  rates  from 
this  section  to  the  East  shows  they  are  relatively 
low.  Outbound  rates  on  the  products  of  the  coun- 
try had  to  be  made  low  per  ton  per  mile  to  enable 
them  to  compete  in  the  Middle  Western  and  East- 
ern markets  with  the  similar  products  of  more 
Eastern  communities.  The  rates  from  the  East  to 
these  communities  were  made  relatively,  and  in 
some  cases  very,  high,  because  they  applied  on 
merchandise  which  could  bear  high  rates,  and  be- 
cause, as  the  railways  had  to  make  low  rates  on 
the  outbound  traffic,  they  considered  themselves 
justified  in  sweetening  their  revenues  with  high 
rates  inbound.  The  consumers  who  ultimately 
paid  the  high  inbound  rates  were  largely  the  pro- 


THE    AMERICAN    TRANSPORTATION    QUESTION 

(Ulcers  who  jiaid  the  low  outbound  rates.  Both 
classes  of  rates  were  made  in  disregard  of  cost  of 
service;  they  were  based  on  "what  the  traffic 
would  bear";  and  if,  for  this  reason,  the  high  in- 
bound rates  should  be  condemned,  then,  for  the 
same  reason,  so  should  the  low  outbound  rates  be. 
But  without  the  low  rates  out,  production  in  that 
section  would  not  have  been  so  well  fostered;  and 
without  the  relatively  high  rates  in  the  railways 
could  not  have  lived  while  production  was  being 
fostered.  Before  we  decide  any  community  is  be- 
ing unfairly  treated  we  should  always  compare  not 
merely  part  of  its  rates  with  part  of  those  of  other 
communities,  but  all  of  its  rates  with  all  of  those 
of  other  communities. 

I  have  tried  already  to  show  that  rates  ought 
not  to  be,  and,  indeed,  cannot  be,  based  entirely  or 
mainly  on  distance.  Ordinarily  they  should  in- 
crease with  distance,  but  not  in  proportion  to  it. 
Often,  however,  distance  is  almost  wholly  ignored. 
For  example,  the  rate  on  oranges  was  $1.15  per 
100  pounds  from  California  to  Salt  Lake  City  and 
the  same  from  California  to  all  points  farther 
East,  including  New  York  City.  The  people  of 
Salt  Lake  City  complained^  about  this  arrange- 
ment. It  does  look  unfair  on  its  face.  But  there 
is  a  reason,  good  or  bad,  for  all  things,  including 


'  Commercial   Club  of  the  Traffic  Bureau  of  Salt  Lake 
City.  Utah,  va.  A.  T.  &  S.  F.  Ry.  Co.  et  ul. 

56 


DISCRIMINATION 

all  railway  rates.  The  farther  East  the  oranges 
are  hauled  the  greater  is  the  cost  of  service.  But, 
also,  the  farther  East  they  go  the  stronger  is  the 
competition  that  they  meet  from  the  oranges  of 
Florida  and  the  West  Indies.  Therefore,  the  rates 
to  the  East  had  to  be  made  on  the  basis  of  addi- 
tional cost,  or  value  of  service,  rather  than  on  that 
of  average  cost,  because  otherw^ise  the  California 
producer  could  not  sell  his  oranges  in  the  East; 
the  railway  would  not  get  to  haul  them  there,  and 
the  Eastern  consumer  would  not  get  to  consume 
them.  The  fact  that  the  highest  rate  the  railway 
could  secure  to  the  most  distant  markets  was  rela- 
tively low  made  it  necessary,  if  it  was  to  receive 
a  reasonable  profit  from  its  total  orange  business, 
to  grade  its  rates  up  to  this  maximum  as  quickly 
as  possible.  Whether  this  way  of  making  rates  is 
justifiable,  I  leave  to  the  reader's  judgment;  but  it 
is  worth  remarking  in  passing  that  while  the  peo- 
ple of  Salt  Lake  City  complained  that  their  rate 
should  not  be  as  high  as  that  to  Chicago  and  New 
York,  the  people  at  Chicago,  1,400  miles  farther 
East,  and  at  New  York,  2,400  miles  farther  east, 
have  never  been  heard  to  complain  that  their  rate 
should  not  be  as  low  as  to  Salt  Lake ! 

Most  complaints  about  discriminations  between 
localities  come  from  communities  more  or  less  di- 
rectly competitive.  The  most  strenuous  and  in- 
sistent relate  to  instances  where  the  rates  are  not 
merely  lower  per  ton  per  mile  to  some  communities 

57 


THE    AMERICAN    TRANSPORTATION    QUESTION 

than  to  others,  but  are  absolutely  less  for  longer 
than  for  shorter  hauls.  If  there  be  cases  where 
the  charging  of  a  lower  rate  for  a  longer  than  for 
a  shorter  haul  is  justifiable  it  goes  without  saying 
that  there  are  conditions  under  which  less  extreme 
discriminations  are  justifiable.  I  certainly  do  not 
believe  that  all  past  or  existing  instances  of  the 
charging  of  higher  rates  for  shorter  hauls  can  be 
defended;  but  I  do  believe  there  are  circumstances 
in  which  this  method  of  making  rates  is  clearly 
defensible. 

Suppose  a  railway  is  100  miles  long  between  two 
points,  A  and  D,  and  that  its  rate  between  them 
is  $1.  Suppose  another  line  to  be  built  over  a 
more  circuitous  route,  so  that  between  the  same 
points  it  is  125  miles  long;  and  that  it  charges 
$1.10  to  a  point,  B,  110  miles  from  A,  and  $1.20  to 
a  point,  C,  120  miles  from  A,  and  meets  the  $1 
rate  of  the  older  road  to  D.  All  the  rates  are 
based  absolutely  on  distance,  except  the  second 
road's  rate  from  A  to  D.  Its  manager  knows  this 
$1  rate  will  not  cover  the  average  cost  of  handling 
all  the  business,  but  it  is  all  he  can  get  and  he  fig- 
ures that  it  will  cover  the  additional  cost  of  hand- 
ling the  A  to  D  traffic  and  leave  some  profit.  The 
first  road  made  this  rate  originally ;  it  was  there 
before  his  road  came;  his  road  merely  met  it.  If 
he  reduced  all  intermediate  rates  to  the  same  basis 
the  people  at  the  intermediate  points  on  his  line 
would  have  lower  rates  per  ton  per  mile,  or  in  pro- 

58 


DISCRIMINATION 

portion  to  cost,  than  those  on  the  competing  line ; 
and,  anyway,  he  could  no  more  afford  to  do  this 
than  he  could  afford  to  reduce  his  rates  on  dry 
goods  to  the  basis  of  those  on  coal,  or  than  the 
packer  could  afford  to  reduce  his  price  for  porter- 
house steak  as  low  as  his  price  for  fertilizer.  ^  If 
he  did  not  meet  the  competitive  rate  he  would 
forego  whatever  profit  he  might  get  by  participat- 
ing in  the  competitive  traffic,  and  the  people  at 
non-competitive  points  on  his  line  would  be  no 
better  off,  because  the  $1  rate  from  A  to  D  was 
made  by  the  first  road  and  would  be  kept  in  by  it 
in  any  event.  In  fact,  it  would  be  better  for  the 
people  at  intermediate  points  on  his  line  for  him 
to  meet  the  competitive  rate,  for  whatever  profit 
he  thus  got  would  tend  to  enable  him  either  to 
make  lower  rates  to  the  intermediate  points,  or  to 


'  It  is  commonly  assumed  that  if  railways  were  absolutely 
prohibited  from  making  lower  rates  for  longer  hauls  they 
would  reduce  all  their  intermediate  rates.  What  they  would 
usually  do,  unless  prevented,  would  be  to  raise  their  rates 
for  the  longer  hauls ;  for  they  would  usually  lose  more  by 
reducing  their  intermediate  rates  than  by  ceasing  to  com- 
pete. The  only  state  where  a  long-and-short  haul  rule  has 
been  rigorously  enforced  is  Iowa,  and  there  the  longer  lines 
between  any  two  points  commonly  do  not  meet  the  rates 
made  by  the  shortest  line.  N.  S.  Ketchum,  a  member  of  the 
Iowa  Railroad  Commission,  in  a  recent  newspaper  interview, 
advocated  modification  of  the  Iowa  law  so  as  to  authorize 
the  Commission  to  determine  when  rates  for  shorter  hauls 
might  be  made  higher  than  for  longer  hauls,  saying  the 
present  rigorous  law  injures  the  state's  industries. 

59 


THE    AMERICAN    TRANSPORTATION    QUESTION 

improve  the  service  of  his  road.  The  most  power- 
ful stimulus  to  improvements  in  service  is  equal- 
ity in  rates  between  competitive  points;  for  where 
rates  by  competing  lines  are  the  same,  superiority 
of  service  is  the  only  thing  a  road  can  offer  to 
attract  competitive  traffic. 

The  competing  route,  instead  of  being  a  shorter 
railway,  may  be  a  waterway.  A  great  majority 
of  the  instances  of  the  charging  of  lower  rates  for 
longer  hauls  are  due  to  controlling  competition  by 
a  shorter  road  or  by  a  water  route  at  the  more 
distant  point. 

Suppose,  however,  there  are  two  competing  rail- 
ways of  substantially  similar  lengths  between 
large  markets;  and  that,  owing  to  their  competi- 
tion the  rates  to  the  large  centers  are  reduced  be- 
low those  to  intermediate  non-competitive  points. 
The  discrimination  under  these  conditions  is  inde- 
fensible, for  the  competition  between  the  railways 
is  a  condition  created  by  themselves  and  one 
which,  unlike  substantial  differences  in  their 
lengths,  or  water  competition,  they  could  remedy. 
I  say  it  is  indefensible,  but  I  say  it  with  one  res- 
ervation. As  it  is  the  policy  of  our  law  to  compel 
unrestricted  competition,  and  as  this  discrimina- 
tion is  a  direct  result  of  competition,  the  railways 
may  with  much  ti-uth  retort  on  their  accusers  that 
they  commit  the  offense  under  duress  from  the 
law  and  the  courts. 

Again,  railways  sometimes  make  lower  rates  for 
60 


DISCRIMINATION 

longer  hauls  merely  to  enable  some  shippers  to 
meet  the  competition  of  other  shippers.  They 
have  made  lower  rates  on  furniture  from  the  Mid- 
dle West  to  the  Pacific  coast  than  to  intermediate 
points  such  as  Spokane,  Washington,  not  because 
of  water  competition,  for  furniture  does  not  move 
by  water  no  matter  how  low  a  water  rate  is  made; 
but  to  enable  the  Middle  Western  furniture  manu- 
facturer to  compete  with  manufacturers  on  the 
Pacific  coast,  who  make  furniture  from  lumber 
native  to  that  section.  When  a  railway  accepts  a 
lower  rate  for  a  longer  haul  to  meet  the  competition 
of  a  shorter  railway  or  a  water  line,  it  can  truly 
say  that  it  is  justified  in  so  doing  because  it  did 
not  make  the  lower  rate  originally  but  that  the 
competing  line  made  it  first  and  that  it  merely 
met  it.  But  here  the  railways  themselves  made 
the  low  rate  to  the  coast  originally ;  and  for  them 
thus  voluntarily  to  make  the  low  rate  to  the  coast 
without  making  it  for  shorter  distances  is  re- 
garded even  by  many  railway  men  as  an  unfair 
discrimination  against  the  intermediate  points. 


CHAPTER  IV 

DISCRIMINATION    BETWEEN  SHIPPERS— REMEDIES 
FOR  DISCRIMINATION 

The  most  harmful  form  of  unfair  discrimination 
is  the  third  kind  I  have  mentioned — that  between 
shippers.  Our  law  seemingly  allows  but  one  form 
of  freight-rate  discrimination  between  persons, 
viz.,  between  those  shipping  in  car  lots  and  those 
shipping  in  less-than-car  lots.  This  distinction  is 
justified  by  the  facts  that  the  station  and  account- 
ing expenses  of  handling  less-than-car  lot  freight 
are  greater,  and  that  the  cost  of  hauling  it  is 
greater  because  usually  the  amount  of  it  moved 
per  car  is  smaller.  No  doubt  the  cost  per  car  load 
of  handling  the  goods  of  those  who  ship  in  multi- 
ple car  load  or  train  load  quantities  is  smaller  than 
that  of  handling  the  goods  of  those  who  ship  in 
single  car  loads;  but  the  difference  in  cost  is  small, 
and  the  value  per  car  load  of  the  service  to  the 
small  shipper  is  no  greater  than  to  the  large  ship- 
per. Therefore,  there  is  perhaps  little  justifica- 
tion for  making  specially  low  rates  for  greater- 
than-car  load  quantities,  although  special  rates  for 
train  loads  are  quite  generally  granted  by  the  rail- 
ways of  Europe. 

62 


DISCRIMINATION— REMEDIES 

The  single  discrimination  permitted  by  law  is 
very  far  from  being  the  only  one  that  has  been 
practiced.  Before,  and  for  some  years  after,  the 
Interstate  Commerce  Act  of  1887,  the  more  or  less 
secret  paying  of  cash  rebates  v/as  universal.  Ev- 
ery shipper  for  whose  business  there  was  any  com- 
petition got  them;  the  only  difference  was  that 
some  got  bigger  ones  than  others.  After  federal 
legislation  was  passed  against  rebating  human  in- 
genuity and  cunning  were  exhausted  in  contriving 
means  and  devices  for  continuing  it  without  the 
direct  and  vulgar  solicitation  and  payment  of 
money.  Both  railway  men  and  shippers  acted  on 
the  theory  that  that  which  we  call  a  rebate  by  any 
other  name  would  smell  as  sweet.  To  enumerate 
in  all  their  versatility  and  shamelessness  the  mul- 
tifarious lawless  means  used  by  shippers  to  get 
through  railway  concessions  the  better  of  other 
shippers,  and  by  railways  to  get  by  the  same 
means  the  better  of  other  railways,  would  be  a 
post-mortem  both  unfruitful  and  unedifying.  Ev- 
ery one  now  admits  that  until  1906,  when  the  Hep- 
burn Act  went  into  effect,  all  railways  unfairly 
discriminated  between  shippers,  and  that  all  ship- 
pers sought  and  accepted  all  the  good  things  that 
were  being  passed  around,  each  being  scrupulous 
only  to  seek  and  struggle  for  more  than  his  fair 
share.  It  will  be  more  to  the  purpose,  rather  than 
to  review  the  bad  conditions  prior  to  1906,  to  con- 
sider those  that  have  existed  since. 

63 


THE    AMERICAN    TRANSPORTATION    QUESTION 

There  has  been  a  very  great  and  most  salutary 
reduction  of  all  forms  of  unfair  discrimination, 
and  especially  of  unfair  discrimination  between 
persons.  The  improvement  has  been  so  extraor- 
dinary that  those  who  have  been  in  close  touch 
with  railway  affairs  only  since  1906  find  it  hard  to 
believe  what  was  done  before.  It  is  even  said 
sometimes  that  unjust  discriminations  between 
persons  ended  in  1906.  Unfortunately,  that  is  not 
true.  Rebating  in  the  old  form  of  cash  deductions 
from  published  rates  practically  ceased;  but  unjust 
discrimination  between  shippers  did  not  cease. 
Fortunately,  it  now  appears  in  the  published  tar- 
iffs, where  it  is  easier  to  detect.  I  have  known 
people  to  defend  certain  existing  discriminations 
because,  as  they  say,  they  are  published  and 
therefore  legal.  The  law  prohibits  unfair,  not 
merely  secret  discrimination.  Otherwise,  it  would 
be  easy  to  anoint  with  printers'  ink  the  blackest 
and  ugliest  discrimination  and  make  it,  legally, 
fair  and  beautiful. 

One  existing  form  of  unfair  discrimination  is 
the  giving  of  disproportionately  low  rates  on  com- 
modities made  or  handled  almost  exclusively  by  cer- 
tain of  the  large  "trusts."  I  have  mentioned  the 
very  low  rates  from  the  Missouri  River  to  Chicago 
on  packing-house  products.  They  are  typical  of 
not  a  few  rates  made  for  the  special  benefit  of 
large  industrial  combinations. 

Another  good  example  of  unduly  low  rates  made 
64 


DISCRIMINATION— REMEDIES 

for  the  benefit  of  large  shippers  is  afforded  by  the 
rates  on  copper.  The  principal  shippers  of  this 
commodity  are  such  large  concerns  as  the  Amalga- 
mated Copper  Company  and  the  American  Smelt- 
ing and  Refining  Company,  It  is  very  valuable, 
the  price  at  present  being  12J  cents  per  pound, 
which  makes  a  60,000  pound  car  load  worth  $7,500. 
Spokesmen  of  the  railways  always  lay  great  stress 
on  the  principle  that  rates  should  be  based  on  the 
value  as  well  as  on  the  cost  of  the  service;  they 
sometimes  contend  that  they  should  be  based  al- 
most entirely  on  its  value.  The  values  of  the  ser- 
vices of  hauling  different  commodities  depend 
mainly  on  the  values  of  the  commodities.  There- 
fore, on  the  value  of  the  service  principle,  copper 
should  be  charged  a  relatively  high  rate.  And 
yet  it  was  shown  in  the  testimony  in  the  Salt  Lake 
rate  case  that  the  copper  rate  from  Utah  and  other 
parts  of  the  West  to  Omaha  was  less  than  the  rate 
on  common  junk! 

The  copper  rate  from  Minnesota  Transfer,  Min- 
nesota, to  New  York  City  is  20  cents  per  100 
pounds.  The  distance  being  1,324  miles,  this  fig- 
ures out  the  extremely  low  rate  of  3  mills  per  ton 
per  mile.  The  revenue  from  a  60,000  pound  car 
load  is  but  $120,  and  the  freight  charges  are  but 
1.6  per  cent,  of  the  value  of  the  commodity.  Com- 
pare this  rate  on  copper  with  those  on  corn,  wheat 
and  flour  from  Minneapolis  to  New  York  City,  a 
distance  of  1,333  miles.     The  price  of  corn  at  the 

65 


T}IE    AMERICAN    TRANSPORTATION    QUESTION 

time  this  chapter  is  written  is  63i  cents  per  bushel. 
A  car  load  of  60,000  pounds  is,  therefore,  worth 
$670.78.  The  corn  rate  is  2Sh  cents  per  100  pounds, 
or  3.5  mills  per  ton  mile,  which  yields  a  revenue 
per  car  load  of  $141.  The  freight  charges  are  20.8 
per  cent,  of  the  value  of  the  shipment.  Wheat  is 
worth  861  cents  per  bushel,  and  therefore  the 
value  of  a  60,000  pound  car  load  is  $867.50.  The 
rate  on  it  is  26  cents  per  100  pounds,  or  3.9  mills 
per  ton  mile,  which  yields  a  revenue  of  $156  per 
car  load.  The  freight  charges  are  17.9  per  cent, 
of  the  value  of  the  commodity.  Flour  is  worth 
$4.90  per  barrel.  There  being  300  barrels  in  a 
car  load  of  60,000  pounds,  its  value  is  $1,470. 
The  rate  is  25  cents  per  100  pounds,  or  3.8  mills 
per  ton  mile.  The  revenue  per  car  load  is  $150, 
which  is  10.2  per  cent,  of  the  value  of  the  com- 
modity. 

The  rates  on  copper,  corn  and  wheat  from  Oma- 
ha to  New  York  are  even  more  significant.  The 
distance  is  1,400  miles.  The  copper  rate  is  20 
cents  per  100  pounds,  or  2.85  mills  per  ton  mile. 
This  yields  a  revenue — again  using  the  60,000 
pound  car  load  as  a  basis— of  $120  per  car;  and  the 
freight  charges  are  1.6  per  cent,  of  the  value  of 
the  commodity.  The  rate  on  corn  is  27  cents  per 
100  pounds,  or  3.85  mills  per  ton  mile.  This  yields 
a  revenue  of  $162  per  car,  which  is  23  per  cent,  of 
the  value  of  the  commodity.  The  rate  on  wheat 
is  28  cents  per  100  pounds,  or  4  mills  per  ton  mile. 

66 


DISCRIMINATION— REMEDIES 

This  yields  a  revenue  of  $168  per  car,  which  is  19.3 
per  cent,  of  the  value  of  the  commodity. 

Grain  rates  in  general  average  less  than  those 
on  any  other  commodity  moving  in  large  quanti- 
ties, except  coal.  The  grain  rates  which  are  here 
compared  with  those  on  copper  are  exceptionally 
low.  Yet  the  rates  on  copper,  in  spite  of  its  very 
great  value,  are  much  less  than  are  these  excep- 
tionally low  grain  rates.  It  would  be  hard  to  find 
a  lower  rate  per  ton  mile  even  on  soft  coal  than 
the  one  of  2.85  mills  on  copper  from  Omaha  to 
New  York  City;  and  while  a  60,000  pound  car  load 
of  copper  is  worth  $7,500,  a  100,000  pound  carload 
of  soft  coal  might  be  worth  less  than  $100.  The 
existing  rates  on  copper  were  in  effect  in  1907, 
when  it  was  worth  22J  cents  per  pound,  or  $13,200 
per  car  load.  The  freight  charge  for  the  haul  of 
1,400  miles  from  Omaha  to  New  York  was  then 
less  than  1  per  cent,  of  the  value  of  the  commod- 
ity, while  the  rates  on  corn  were  around  20  per 
cent,  of  its  value. 

Another  example  of  unfair  discrimination  is  the 
allowance  of  excessive  divisions  of  through  rates 
to  so-called  "tap  line"  railways.  These  are  rail- 
v/ays,  usually  small  ones,  owned  by,  or  controlled 
by  the  same  interests  as,  great  industrial  corpora- 
tions, and  originating  traffic  from  their  plants  and 
delivering  it  to  the  trunk  line  railways.  Many 
tap  lines  that  have  received  divisions  of  rates  are 
mere  plant  facilities  and  no  more  entitled  to  par- 

67 


THE    AMERICAN    TRANSPORTATION    QUESTION 

ticipate  in  a  railway  rate  than  a  facility  composed 
of  horses  and  a  truck  would  be  if  the  company 
chose  to  team  its  goods  to  the  railway.  Even 
when  tap  lines  are  really  common  carriers  they 
very  commpnly  get  larger  allowances  of  various 
kinds  from  the  trunk  lines  than  they  are  entitled 
to.  In  one  case'  the  Interstate  Commerce  Com- 
mission held  that  a  tap  line  which  switched  cars 
no  more  than  four  miles  was  entitled  to  no  more 
than  three  dollars  a  car  for  the  service,  basing  its 
ruling  on  the  amounts  railways  pay  and  receive 
for  switching  cars  for  each  other.  Numerous  tap 
lines  are  still  receiving  allowances  much  in  excess 
of  this  in  proportion  to  the  services  they  render. 
It  is  one  of  the  many  inconsistencies  of  our 
laws  that  the  "Carmack  Amendment"  to  the  Hep- 
burn Act  forbids  railways  to  haul  commercial  prod- 
ucts belonging  to  them  while  it  allows  industrial 
corporations  to  own  railways,  many  of  them  thou- 
sands of  miles  long,  which  are  sometimes  used  to 
secure  and  perpetuate  the  most  odious  discrimina- 
tions. 

Another  widespread  abuse,  which  an  investiga- 
tion by  the  Interstate  Commerce  Commission  dis- 
closed in  1909,  was  what  is  technically  known  as 
"substitution of  tonnage  at  transit  points."  ^  The 
transit  arrangement  gives  to  the  shipper  the  privi- 

'  Re-Divisions  of  Joint  Rates,  10  I.  C.  C. ,  385. 
"  In  Re-Subdivision  of  Tonnage  at  Transit  Points,  18  I. 
C.  C,  280. 

68 


DISCRIMINATION— REMEDIES 

lege  of  stopping  a  commodity  in  course  of  trans- 
portation, holding  it  for  such  period  and  making 
such  changes  in  it  as  may  be  specified  in  the  tar- 
iff, and  then  forwarding  it,  all  for  the  through 
rate  from  the  point  of  origin,  to  final  destination. 
If  a  grain  dealer  ships  wheat  from  South  Dakota 
to  Chicago  and  sells  and  delivers  it  to  a  local  miller 
there,  and  subsequently  buys  wheat  from,  say,  a 
point  in  Illinois  and  ships  it  to  the  East,  he  ought 
to  pay  on  the  wheat  from  South  Dakota  the  local 
rate  to  Chicago,  and  on  the  Illinois  wheat  the  local 
rate  from  Illinois  to  the  East.  But  if  a  grain 
dealer  ships  wheat  from  a  point  in  South  Dakota 
to  Chicago,  puts  it  in  an  elevator  there,  keeps  it 
for  a  while  and  then  ships  it  out  to  the  East,  he  is 
required,  by  transit  rules,  to  pay  only  the  through 
rate  from  South  Dakota  to  the  ultimate  destina- 
tion. By  means  of  substitution  of  tonnage,  ship- 
pers at  many  transit  points  have  got  the  benefit 
of  the  through  rate  on  what  were  really  local  ship- 
ments. For  example,  the  local  rate  from  the  Mis- 
souri River  to  Chicago  on  wheat  was  12  cents  per 
100  pounds,  and  the  local  rate  from  Chicago  to  the 
Ohio  River  was  7  cents,  the  total  sum  being  19 
cents.  The  through  rate  from  the  Missouri  River, 
via  Chicago,  to  the  Ohio  River  on  a  transit  basis 
was  13  cents,  or  6  cents  less.  A  practice  grew  up 
under  which  the  dealer  who  sold  in  Chicago,  or 
shipped  out  from  there  by  boat,  grain  from  the 
Missouri  River,  subsequently  took  the  balance  of 
6  69 


THE    AMERICAN    TRANSPORTATION    QUESTION 

the  through  billing  and  shipped  out  on  it  to  the 
Ohio  River  grain  which  originated  at  points  in  Illi- 
nois South  and  East  of  Chicago  and  which  was  not 
entitled  to  the  transit  privilege  to  the  Southeast 
through  Chicago.  He  made  two  local  shipments, 
one  from  the  Missouri  River  to  Chicago,  and  one 
from  Chicago  to  the  Southeast.  He  ought  to  have 
paid  on  them  the  sum  of  the  tv/o  local  rates,  19 
cents.  What  he  did  was  to  so  use  his  through 
billing  from  the  Missouri  River  via  Chicago  to  the 
Southeast  as  to  get  a  rate  of  13  cents,  securing 
thus  a  rebate  of  6  cents,  or  almost  30  per  cent. 
As  the  transit  privilege  is  not  granted  at  all  points, 
and  as  the  opportunities  for  thus  substituting  ton- 
nage are  not  equally  good  at  all  markets,  this  sort 
of  abuse  operates  as  an  unfair  discrimination  both 
between  shippers  and  between  markets.  Since 
the  investigation  by  the  Interstate  Commerce 
Commission  there  has  been  less  abuse  of  the  tran- 
sit privilege,  but  it  has  not  been  entirely  stopped, 
and  shippers  at  some  places  show  a  disposition  to 
fight  every  rule  proposed  to  stop  it. 

Another  form  of  abuse  that  has  developed  since 
the  Hepburn  Act  went  into  effect  has  been  the  oc- 
casional presentation  by  shippers  and  allowance 
by  railways  of  excessive  claims  for  loss  of  and 
damage  to  freight.  Again,  the  railways  make 
special  rates  for  "return  shipments";  that  is,  for 
the  return  of  goods  to  the  shipper  when  they  are 
in  a  damaged  condition  on  reaching  the  consignee, 


DISCRIMINATION— REMEDIES 

or  because  he  will  not  receive  them;  and  large  cor- 
porations have  been  caught  making  original  ship- 
ments from  branch  houses  on  these  low  rates  in 
the  guise  of  return  shipments. 

Examples  of  still  existent  preferences  and  ad- 
vantages might  be  further  multiplied.  Enough 
have  been  cited  to  show  that  unjust  discrimina- 
tions between  shippers  have  not  been  extirpated. 
Why  do  they  continue?  Is  it  because  shippers  and 
railway  men  are  incorrigibly  unscrupulous?  This 
is  not  the  explanation.  It  is  simply  because,  while 
most  shippers  and  most  railway  men  want  to  deal 
fairly  and  obey  the  law,  there  is  a  minority  who 
still  brave  the  statutes  to  get  unfair  advantages. 
The  shipper  who  wants  to  gain  an  undue  preference 
over  his  competitors  goes  shopping  among  the  rail- 
ways, tempting  or  putting  pressure  on  their  offi- 
cers by  offering,  or  threatening  the  withdrawal 
of,  traffic.  He  is  apt  finally  to  find  some  traffic 
manager  whose  hunger  for  more  business  or  ap- 
prehension of  the  loss  of  present  business  exceeds 
his  scruples  and  his  fear  of  the  law.  When  a 
shipper  has  got  an  unfair  concession  from  one 
road  he  at  once  demands  it  from  others,  under 
threat  of  withdrawing  business  from  roads  that 
do  not  give  it.  Competing  shippers  demand  the 
same  concession,  both  from  the  first  road  and  from 
others  which,  for  competitive  reasons,  grant  it. 
Thus,  when  the  unscrupulous  railway  man  and  the 
unscrupulous  shipper  strike  hands  there  is  the  be- 

71 


THE    AMERICAN    TRANSPORTATION    QUESTION 

ginning^  of  unfair  rates  or  allowances  by  all  the 
competing  railways  to  all  the  competing  shippers 
whose  business  is  worth  bidding  for.  In  other 
words,  as  I  have  remarked  before,  the  policy  of 
our  law  is  to  compel  unrestricted  railway  competi- 
tion; and  unfair  discrimination  between  shippers, 
as  well  as  between  commodities  and  localities,  is 
the  offspring  of  excessive  competition.  As  Martin 
A.  Knapp,  formerly  Chairman  of  the  Interstate 
Commerce  Commission,  and  now  Chief  Justice  of 
the  Commerce  Court,  has  said :  ^ 

The  evils  which  have  attended  the  growth  and  man- 
agement of  our  railway  systems  and  which  have  pro- 
voked so  much  public  indignation  have  their  origin 
and  inducement  for  the  most  part  in  the  competition 
of  carriers,  which  it  is  still  our  legislative  policy  to 
enforce.  ...  It  is  simply  out  of  the  question  to  have 
at  the  same  time  the  presence  of  competition  and  the 
absence  of  discrimination. 

Many  people  think  that  railway  men  unfairly 
discriminate  from  mere  mischievousness  of  spirit. 
The  fact  is,  that  railway  managers  have  been  try- 
ing to  stop  unjust  discrimination  for  many  years, 
simply  because  such  discrimination  decimates  rail- 
way revenues.  Before  the  passage  of  the  Act  to 
Regulate  Commerce  they  formed  pools  to  maintain 
rates  and  prevent  unfair  discrimination.     The  Act 


'  Speech  at  the  dinner  of  the  Railway  Business  Associa- 
tion, New  York  City,  November  22,  1910. 

72 


DISCRIMINATION— REMEDIES 

to  Regulate  Commerce,  passed  in  1887,  prohibited 
both  unfair  discrimination  and  pooling.  The  pub- 
lic objected  to  pooling  because  it  was  thought  that 
whatever  restricted  competition  tended  to  make 
rates  high.  Most  authorities  think  that  it  did  not 
tend  to  make  rates  unduly  high,'  and  that  it  did 
tend  to  reduce  discrimination.  After  the  Act  to 
Regulate  Commerce  went  into  effect  the  railways 
formed  traffic  associations,  having  the  same  pur- 
poses as  pools  of  competitive  traffic  or  earnings. 
These  were  declared  by  the  Supreme  Court  of  the 
United  States  in  the  Trans-Missouri^  and  the  Joint 
Traffic  Association  cases  to  be  in  violation  of  the 
Sherman  Antitrust  Act.     It  held  that  any  com- 


'  "It  does  not  seem,  moreover,  that  the  pools  were  a 
detriment  to  the  public.  Although  the  rival  railroads  made 
their  rates  by  joint  action,  and  united  to  maintain  the 
charges  thus  agreed  upon,  they  were  not  able  to  control  the 
industrial  forces  to  which  transportation  charges  are  in  a 
large  measure  subject.  Nor  was  it  possible  for  the  railroads 
by  means  of  rate  agreements  and  pools  to  prevent  the  ocean, 
the  large  rivers,  and  the  Great  Lakes  from  exercising  a 
wide  and  effective  influence  on  rail  rates.  From  1870,  when 
pooling  began,  to  1887,  when  it  was  prohibited  by  law,  the 
average  receipts  of  the  railroads  of  the  United  States  for 
hauling  a  ton  of  freight  one  mile  declined  from  nearly  two 
cents  (in  gold)  to  about  one  cent;  in  other  words,  the  aver- 
age ton-mile  earnings  in  1887  were  only  a  little  more  than 
half  those  of  1870.  Charges  did  not  decrease  because  of 
pools,  but  the  pools  did  not  prevent  their  decline.  " — "Amer- 
ican Railway  Transportation,"  by  Professor  Emory  R. 
Johnson,  pp.  238,  239. 

2166  U.  S.,  290. 

73 


TllK    AMKRICAN    TRANSPORTATION    QUKSTION 

bination  between  railways,  reasonable  or  unrea- 
sonable, to  restrict  competition  was  unlawful. 
The  effect  of  the  legislation  against  pooling  and  of 
the  decisions  of  the  Supreme  Court  in  these  cases 
was  to  stimulate  the  tendency  toward  railway  con- 
solidation.    As  Professor  Johnson  says: ' 

For  many  years  the  rival  companies  sought  to  pre- 
vent competition  from  producing  its  undesirable  re- 
sults by  rate  and  traffic  agreements;  but  when  it  be- 
came impracticable  for  the  railroads,  either  directly 
or  indirectly,  to  effect  such  agreements,  the  only  avail- 
able course  of  action  was  to  secure  unity  of  manage- 
ment by  such  consolidation  as  would  tend  to  divide  the 
field.  Undoubtedly,  the  railway  consolidations  would 
have  taken  place  and  the  strong  systems  would  have 
continued  to  become  larger  had  the  Interstate  Com- 
merce Law  permitted  pooling  and  had  the  courts  not 
held  the  antitrust  law  to  apply  to  rate  agreements; 
but  the  incentive  to  consolidation  would  have  been  less 
urgent  and  the  process  would  probably  have  been 
slower. 

To  prevent  unfair  discrimination,  it  was  neces- 
sary for  the  roads  to  cooperate  in  order  to  keep 
competition  within  reasonable  limits.  But  the 
Sherman  Act  forbade  such  cooperation ;  it  equally, 
as  the  Supreme  Court  later  held  in  the  Northern 
Securities  case,  forbade  consolidation.  Finding  it 
necessary,  as  they  believed,  to  break  one  law  or 

'  "American  Railway  Transportation,"  page  251. 
74 


DISCRIMINATION— REMEDIES 

the  other,  the  railways  chose  what  seemed  the 
lesser  of  two  evils,  and  broke,  and  probably,  in 
some  instances,  are  still  breaking,  the  Sherman 
Law.  But  they  dared  not  violate  it  as  openly  as 
was  necessary  entirely  to  prevent  unfair  discrim- 
ination; so  the  effect  of  the  decisions  under  the 
Sherman  Law  and  of  the  enforcement  of  the  Inter- 
state Commerce  Act  has  been  to  cause  the  latter 
to  be  obeyed  somewhat  better  than  formerly,  but 
not  entirely;  and  to  cause  the  former  to  be 
pretty  frequently  disobeyed  in  spirit,  if  not  in 
letter. 

Government  regulation  of  railways  has  no  more 
important  object  than  the  complete  suppression 
and  prevention  of  unjust  discrimination.  Past 
experience  shows  that  to  accomplish  this  the  adop- 
tion of  at  least  two  means  are  necessary : 

First.  The  Interstate  Commerce  Act  and  the 
Sherman  Law  should  be  so  amended  as  to  permit 
reasonable  concerted  action  by  railways  regarding 
competitive  rates.  It  is  no  longer  necessary,  in 
order  to  keep  rates  from  being  maintained  at,  or 
being  raised  to,  unreasonable  heights,  to  forbid 
such  concerted  action.  The  Hepburn  Act  gives 
the  Interstate  Commerce  Commission  authority  to 
reduce  any  unreasonable  rate  and  the  Mann-Elkins 
Act  gives  it  authority  to  restrain  any  proposed  ad- 
vance in  rates,  pending  investigation,  and  to  for- 
bid it  if  found  unreasonable.  Why  should  we 
continue  to  forbid  railways  from  acting  together 

75 


THE    AMP]RICAN    TRANSPORTATION    (iUKSTION 

regarding  competitive  rates,  when  the  Commis- 
sion has  ample  power  both  to  reduce,  and  to  pre- 
vent the  making  of,  any  excessive  rate,  whether 
made  or  proposed  by  one  railway  or  by  the  con- 
certed action  of  any  number  of  railways? 

Second.  The  Commission  ought  to  be  given  the 
same  authority  to  fix  minimum,  that  it  now  has  to 
fix  maximum,  rates.  Unfair  discrimination  does 
not  consist  in  making  rates  too  high.  It  consists 
in  establishing  an  unjust  relation  between  them — 
a  relation  which  may  exist  either  between  two  rates 
that  are  too  low,  or  between  two  rates  that  are  too 
high,  or  between  one  rate  that  is  too  high  and 
another  that  is  too  lov/,  or  between  one  that  is  too 
high  and  another  that  is  just  high  enough,  or 
between  one  that  is  just  high  enough  and  another 
that  is  too  low.  Obviously,  therefore,  full  authority 
justly  to  remove  discriminations  must  include  the 
power  to  raise  a  rate  that  is  too  low  as  well  as  to 
reduce  one  that  is  too  high. 

It  may  be  said  that  when  a  discrimination  con- 
sists in  the  fact  that  one  rate  is  too  low  as  com- 
pared with  another,  the  railways  can  remove  it 
by  raising  the  lower  rate.  But  while  any  one  of 
a  number  of  competing  railways  can  reduce  a 
rate,  it  takes  all  of  them  to  raise  it.  Now,  it  not 
infrequently  happens  that  the  same  men  who  con- 
trol a  big  industrial  concern  having  a  large  traffic, 
also  own  a  large,  or  even  controlling  part  of  the 
stock  of  one  of  a  number  of  competing  railways 

76 


DISCRIMINATION— REMEDIES 

and  have  representatives  on  its  board,  and  that 
they  use  their  influence  over  this  rail^^ay  to  get 
it  to  make  unfairly  low  rates  on  the  commodities 
of  the  industrial  concern  in  which  they  are  inter- 
ested. There  is  no  power  under  existing  law  by 
which  a  railway  thus  dominated  for  the  benefit  of 
an  industrial  concern  can  be  compelled  to  raise 
a  rate  paid  by  that  concern.  But  to  permit  it  to 
make  disproportionately  low  rates  on  commodities 
in  which  some  of  its  stockholders  and  directors 
are  interested  is  palpably  unfair  to  its  other  stock- 
holders, to  other  railways  and  to  other  shippers. 
It  would  seem  plain  that,  in  such  circumstances, 
the  Interstate  Commerce  Commission  ought  to 
have  and  to  exercise  the  authority  to  compel  the 
advance  of  an  unreasonably  low  rate. 

To  get  these  changes  in  our  laws  and  to  get  the 
laws  against  unjust  discrimination  enforced  and 
obeyed,  our  great  need  is  a  more  enlightened  and 
a  fairer  public  opinion  on  this  subject.  Public 
opinion  too  often  fails  to  distinguish  accurately 
between  what  is  fair  and  wholesome,  and  what  is 
unfair  and  harmful,  in  railway  rates.  It  magni- 
fies molehills  into  mountains  and  minimizes 
mountains  into  molehills.  It  condemns  practices 
without  which  the  railway  business  could  not  be 
salutarily  conducted,  and  condones  and  even  favors 
practices  which  are  incompatible  with  its  being 
even  decently  conducted. 

Furthermore — and  this  is  one  of  the  main 
77 


TIIK    AMERICAN    TRANSPORTATION    QUESTION 

reasons  why  these  abuses  have  been  so  persistent 
— public  opinion  does  not  fairly  apportion  the 
blame  for  unjust  discrimination.  It  visits  the 
bulk  of  it3  condemnation  for  them  on  railway 
managers,  when,  as  a  matter  of  fact,  railway 
managers  are  no  more  responsible  for  them  than 
are  big  shippers.  In  the  great  majority  of  cases 
it  is  the  shipper  who  first  suggests  the  discrimi- 
nation, simply  because  he,  not  the  railway,  will 
be  its  chief  beneficiary ;  and  the  public  has  little 
conception  of  how  perseveringly  many  big  ship- 
pers press  for  illegal  concessions  even  after  rail- 
way men  have  repeatedly  protested  against  them 
on  the  ground  of  their  injustice  and  unlawfulness. 
The  big  shipper  has  a  great  advantage  over  the 
railway  traflSc  manager  in  business  negotiations, 
because,  while  the  railway,  being  a  public  service 
corporation,  cannot  legally  retaliate  on  the  shipper 
who  discriminates  against  it  by  taking  or  with- 
drawing business  from  it,  the  shipper  can  retaliate 
on  the  railway  that  refuses  to  do  his  bidding,  by 
taking  his  business  entirely  away  from  it;  and  the 
big  shippers  use  ruthlessly  the  power  that  their 
ability  to  give  or  withhold  traffic  confers.  As  I 
have  pointed  out,  in  not  a  few  cases  the  same  in- 
terests that  control  a  large  industrial  corporation 
also  are  large  factors  in  one  or  more  of  a  group  of 
competing  railways.  When  this  is  true,  it  is  lit- 
tle short  of  a  miracle  if  this  industrial  concern 
pays  fair  rates. 

78 


DISCRIMINATION— REMEDIES 

The  big  shippers  always  have  succeeded  in  put- 
ting most  of  the  odium  for  unfair  discrimination 
on  the  railways  while  getting  most  of  the  benefits 
of  it  themselves.^  When  an  attempt  is  made  to 
raise  rates  in  which  they  are  concerned  their  rep- 
resentatives are  the  first  to  appear  before  the  In- 
terstate Commerce  Commission  as  tribunes  of  the 
people.  The  public  is  apt  to  forget  that  no  rebate, 
or  other  form  of  unfair  discrimination,  was  ever 
given  that  somebody  did  not  receive.  It  should 
not  condemn  the  railways  any  more  severely  than 
it  has  in  the  past  for  unjust  practices;  but  it  needs 
to  learn  that  the  big  shippers  are  working  for 
their  own  pockets  all  the  time;  that  every  unfairly 
low  rate  and  every  unjust  concession  that  they 
get,  like  every  secret  rebate,  either  deprives  the 
railway  of  the  ability  to  earn  a  fair  return  or 
makes  it  necessary  for  other  shippers  to  pay  higher 
rates  than  they  ought  to  be  required  to  pay ;  and 

'  The  success  the  big  shippers  have  had  in  getting  illegal 
favors  from  the  railways,  and  then  causing  the  railways 
alone  to  be  punished  for  giving  them,  reminds  me  of  a  joke 
played  by  an  old  friend  of  mine  down  in  Missouri.  He  was 
the  most  inveterate  practical  joker  I  ever  knew.  Once 
when  he  was  very  sick  an  intimate  friend  went  out  and  shot 
some  quail  to  provide  him  with  a  delicate  repast.  The  old 
gentleman,  while  ill,  was  very  appreciative.  But  "The 
Devil  was  sick,  the  Devil  a  monk  would  be ;  the  Devil 
was  well,  the  Devil  a  monk  was  he."  As  soon  as  my 
old  friend  had  recovered  he  went  before  a  justice  of  the 
peace  and  had  the  Nimrod  fined  for  hunting  out  of  season  in 
violation  of  the  state  game  laws ! 

79 


THK    AMERICAN    TRANSPORTATION    QUESTION 

that,  therefore,  the  shipper  who  gets  and  benefits 
by  an  unfair  discrimination  deserves  just  as  severe 
condemnation  and  punishment  as  the  railv^ay  man 
v^^ho  gives  it.  We  will  never  stop  unjust  discrim- 
ination, never  get  fair  and  salutary  regulation  of 
rates,  until  the  public  clearly  and  fully  recognizes 
the  fact  that  in  the  public  interest  it  is  just  as 
needful  that  public  regulation  shall  protect  the 
railway  from  the  shipper  as  it  is  that  it  shall  pro- 
tect the  shipper  from  the  railway. 


CHAPTER  V 
RAILWAY   VALUATION   AND   PROFITS 

Until  lately  the  main  problem,  and  aim,  of  reg- 
ulation of  railways  was  the  suppression  of  unfair 
discrimination  in  rates  between  commodities,  com- 
munities and  persons.  Different  states  had  passed 
laws  to  reduce  entire  schedules  on  the  ground 
that  they  were  excessive;  but  often  the  belief  that 
they  were  excessive  grew  out  of  comparisons  be- 
tween them  and  lower  rates  in  other  states.  It  was 
generally  agreed  that,  on  the  average,  American 
railway  rates  were  reasonable.  But  recently  the 
questions — of  what  are  the  correct  standards  for 
determining  whether  the  rates  as  a  whole  of  each 
of  our  railways,  and  of  all  of  them,  are  excessive 
or  unremunerative,  or  just  the  happy  mean  be- 
tween these  two  extremes ;  and  of  how,  when  en- 
tire schedules  are  found  unreasonable,  they  shall 
be  made  reasonable — have  become  of  paramount 
interest  and  importance. 

The  change  is  due  to  two  causes.  One  is  the 
reduction  during  the  past  five  years  in  the  num- 
ber and  perniciousness  of  unfair  discriminations, 
which  has  made  the  question  of  their  elimination 
relatively  less  important.     The  other  is  the  con- 

81 


THP:    AMERICAN    TRANSPORTATION    QUESTION 

troversy  and  stru^sle  between  travelers,  shippers, 
and  iTiiiny  public  men,  on  the  one  side,  and  the 
managers  of  the  railways,  on  the  other,  that  have 
sprung  from  the  belief  of  the  former  that  rates  as 
a  whole  are  too  high,  and  their  attempts  to  reduce 
them,  and  the  belief  of  the  latter  that  rates  are 
too  low,  and  their  attempts  to  raise  them. 

Economists  have  used  three  standards  for  meas- 
uring the  reasonableness  of  entire  schedules  of 
rates.*  The  first  is  their  effect  on  traffic.  If  they 
hamper  its  movement  and  growth,  that  is  conclu- 
sive proof  that  they  exceed  the  value  of  the  service 
rendered  for  them  and  are  excessive;  and  the 
courts  of  this  country  will  in  that  case  reduce 
them,  even  if  the  effect  be  to  disable  the  roads 
concerned  from  earning  any  profit  whatever.^ 
The  railway's  right  to  a  return  is  subordinate  to 
the  public's  right  to  reasonable  rates.  Tested  by 
their  effect  on  traffic  the  rates  of  the  railways  of 
the  United  States  as  a  whole  cannot  be  regarded 
as  unreasonable.  In  all  parts  of  the  country  traffic 
moves  freely,  and  grows  as  fast  as,  or  faster  than, 
facilities  can  be  provided  to  handle  it. 

The  second  test  economists  have  used  is  com- 
parison between  the  rates  in  question  and  those  of 
other  railways.  Owing  to  the  great  differences 
between  the  conditions  under  which  railways  are 
built  and  operated,  this  is  seldom  an  easy  standard 

'  Hadley,  "Railroad  Transportation,"  page  103. 
-Reagan  rs.  Farmers'  Loan  and  Trust  Co.,  154  U.  S.,  3G2. 

82 


VALUATION    AND    PROFITS 

to  apply.  Rates  that  would  be  excessive  on  roads 
built  and  operated  at  small  cost,  and  having  a 
large  traffic,  would  be  reasonable  on  lines  built 
and  operated  at  large  cost  and  having  a  small  vol- 
ume of  traffic.  Again,  some  railways  handle  a 
larger  proportion  than  others  of  cheap,  bulky  com- 
modities. These  must  be  given  comparatively  low 
rates  if  they  are  to  move  freely ;  and  they  can  be 
because  they  can  be  hauled  in  large  car  loads,  or 
even  in  solid  train  loads,  at  relatively  small  cost. 
Then,  some  roads  get  much  longer  average  hauls 
than  others,  which  also  tends  to  enable  them  to 
handle  the  traffic  more  cheaply  and  to  make  lower 
rates.  Adequate  weight  must  be  given  to  such 
dissimilarities  of  conditions  to  make  comparison 
of  the  rates  of  different  railways  at  all  useful. 

Now,  the  railways  of  the  United  States  have 
cost  a  great  deal  less  than  those  of  England,  and 
substantially  less  than  most  of  those  of  Europe. 

On  the  other  hand,  the  prices  they  have  to  pay 
for  materials  and  labor  with  which  to  conduct 
their  operations  are  much  higher.  Their  density 
of  passenger  traffic  is  much  less  than  that  of  the 
railways  of  Europe.  On  the  other  hand,  their 
freight  traffic  is  denser  than  that  of  the  railways 
of  Europe.  This  is  both  because  it  contains  a 
larger  proportion  of  cheap,  bulky  commodities, 
and  because  in  Europe  the  railways  handle  the 
very  valuable  goods  moving  in  small  consignments 
which  in  this  country  are  handled  by  separate  car- 

83 


THE    AMERICAN    TRANSPORTATION    QUESTION 

riers — the  express  companies.  For  these  reasons 
we  should  expect  to  find  that  the  average  rate  per 
passenger  per  mile  here  is  higher,  and  that  the 
average  rate  per  ton  per  mile  is  as  low  as,  or  lower 
than,  in  Europe.  And  this  is  the  case.  The 
average  passenger  rate  in  the  United  Kingdom  is 
about  1.54  cents;  in  Germany,  9.3  mills;  in  France, 
1.54  cents;  and  in  the  United  States,  1.94  cents. 
The  average  rate  per  ton  per  mile  in  the  United 
Kingdom  is  about 2  cents;  in  Germany,  1.27  cents; 
in  France,  1.28  cents;  and  in  the  United  States, 
.753  cents.  Allowing  fully  for  differences  in  con- 
ditions, rates  in  the  United  States  as  a  whole  are 
as  low,  if  not  lower,  as  anywhere  else  in  the  world. 

The  third  test  economists  have  applied  in  con- 
sidering the  reasonableness  of  rates  as  a  whole  is 
the  net  return  on  their  capitalization  received  by 
the  railways  charging  them.  Measured  by  this 
standard  also  the  rates  of  the  railways  of  the 
United  States  are  low.  They  have  never  in  any 
year  paid  as  much  as  4  per  cent,  on  both  their 
bonds  and  stock.' 

In  recent  years  a  new  theory  of  the  proper  way 
to  ascertain  the  reasonableness  of  rates  has  gained 
wide  acceptance.  Many  believe  that  the  railways 
of  this  country  are  overcapitalized.  They  think, 
therefore,  that  the  return  on  their  capitalization 
is  not  a  criterion  of  the  reasonableness  of  their 


'  Poor's  Manual,  1910,  page  cxiv. 

84 


VALUATION   AND    PROFITS 

rates.  The  sole  true  criterion,  they  believe,  is  a 
"fair  return"  on  the  "fair  value"  of  the  proper- 
ties of  the  railways;  a  "fair  return"  is  the  current 
rate  of  interest;  and  therefore  the  government 
should  make  a  valuation  of  the  properties,  and  in 
future  so  regulate  rates  as  to  restrict  net  earnings 
to  the  current  rate  of  interest  on  this  valuation. 

All  agree  that  return  to  the  owners  of  the  rail- 
ways should  be  considered,  and  given  much 
weight,  both  in  making  and  regulating  rates.  The 
differences  of  opinion  arise  over  (1)  the  basis  on 
which  the  return  should  be  computed;  (2)  the  per- 
centage of  it  that  should  ordinarily  be  allowed  to 
be  earned;  and  (3)  the  weight  that  should  be 
given  to  it  in  regulating  rates,  compared  with  the 
weight  that  should  be  given  to  other  considera- 
tions. 

Many  believe  that  the  just  basis  on  which  to 
compute  the  percentage  of  the  net  earnings  of  the 
railways  in  order  to  ascertain  whether  their  rates 
are  too  high  or  too  low  is  the  capital  that  has  been 
invested  in  them,  exclusive  of  earnings.  Large 
amounts  of  net  earnings,  that  legally  might  have 
been  paid  out  to  the  stockholders,  have  instead 
been  invested  in  the  properties.  The  properties 
also  contain  a  large  amount  of  so-called  "unearned 
increment."  It  is  argued  that,  as  railways  are 
public  service  corporations,  their  owners  are  not 
entitled  to  receive  a  return  on  those  parts  of  their 
value  which  have  been  created  by  the  investment 
7  85 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  earnings  or  by  increases  in  the  value  of  real  es- 
tate caused  by  the  industrial  development  of  the 
country. 

The  owners  and  managers  contend,  on  the  other 
hand,  that  in  any  estimate  that  may  be  made  of 
the  value  of  the  properties  on  Vv^hich  a  return 
should  be  allowed  to  be  earned,  every  factor  enter- 
ing into  their  present  value  should  be  considered. 
The  net  earnings,  they  say,  belong  to  the  stock- 
holders. They  may  either  invest  them  or  pay 
them  out  as  dividends;  and  where  they  have 
chosen  to  invest  them  the  value  thereby  added  be- 
longs to  them.  They  also  own  the  real  estate  used 
for  railway  purposes  as  absolutely — so  long  as  it  is 
used  for  railway  purposes — as  the  farmer  owns  his 
farm;  and  therefore  they  have  the  same  right,  it 
is  said,  to  profit  by  increases  in  its  value. 

From  a  legal  standpoint  the  spokesmen  for  the 
railways  seem  to  have  the  better  of  the  argument. 
The  fifth  and  fourteenth  amendments  to  the  Fed- 
eral Constitution  prohibit  the  Nation  and  the  States 
from  taking  private  property  for  public  use  with- 
out due  process  of  law  and  just  compensation. 
When  the  railway,  in  the  exercise  of  the  power  of 
eminent  domain,  takes  the  farmer's  land,  these 
provisions  are  construed  to  mean  that  it  must  pay 
him  for  it — not  what  it  cost  him— but  its  reason- 
able market  value  at  the  time  that  it  is  taken.  A 
similar  construction  of  the  same  provisions  as  they 
apply  to  railways  would  require  that  rates  should 

86 


VALUATION    AND    PROFITS 

be  so  regulated  as  to  enable  the  railways  to  earn  a 
return  on  the  value  of  their  properties  at  the  time 
that  the  rates  are  being  regulated,  however  the 
value  may  have  been  created.  For  if  the  rates 
were  so  regulated  as  to  disable  the  company  from 
earning  a  return  on  any  part  of  the  value  of  its 
property  this  would  be,  in  effect,  to  take  so  much 
of  its  value.  The  Supreme  Court  of  the  United 
States  has,  therefore,  indicated  that  while  the 
original  cost  of  construction  of  public  utilities, 
when  ascertainable,  should  be  considered,  this  is 
merely  to  get  such  light  as  it  will  throw  on  their 
present  value.  In  a  recent  case  involving  the 
rates  of  a  gas  company  it  said :  ^ 

We  concur  with  the  court  below  in  holding  that  the 
value  of  the  property  is  to  be  determined  as  of  the 
time  when  the  inquiry  is  made  regarding  the  rates. 
If  the  property  which  legally  enters  into  the  considera- 
tion of  the  question  of  rates  has  increased  in  value 
since  it  was  acquired  the  company  is  entitled  to  the 
benefit  of  such  increase. 

The  United  States  Circuit  Court  for  the  District 
of  Minnesota  recently  held  similarly  in  a  case  in- 
volving railway  passenger  and  freight  rates  fixed 
by  the  state  authorities  of  Minnesota.    It  said: 

The  costs  of  rights  of  way  from  5  to  40  years  ago 
through  wild  lands,  and  through  towns  and  villages 

'  Wilcox  vs.  Consolidated  Gas  Company,  212  U.  S.,  19. 

87 


THE    AMERICAN    TRANSPORTATION    QUESTION 

whose  population  and  the  value  (tf  the  property  in 
which  have  since  multiplied  by  from  2  to  10,  is  obvi- 
ously no  criterion  of  the  value  of  those  rights  of  way 
in  1908,  when  they  were  used  under  these  fares  and 
rates  and  when  agricultural  lands  in  Minnesota  were 
worth  from  $35  to  $100  an  acre,  and  rights  of  way 
and  land  for  yards  and  sites  for  stations  in  cities  like 
St.  Paul  and  Duluth  have  wonderfully  increased  in 
value.  It  is  a  fair  return  upon  the  reasonable  value 
of  their  Minnesota  property  in  1908  to  which  these 
companies  were  entitled,  and  the  cost  of  that  property 
at  times  varying  from  five  to  forty  years  ago  may  be 
some  evidence;  but  it  certainly  is  no  criterion  of  its 
value  in  that  year. 

It  costs  on  the  average  from  one  and  one-third 
to  three  times  as  much  to  get  land  for  railv^ay  as 
for  other  purposes.  This  is  because  its  acquisition 
and  use  for  railw^ay  purposes  involve  damage  to 
adjacent  property  which  must  be  paid  for,  and  be- 
cause land  that  is  directly  in  the  path  of  a  coming 
railway  attains  a  monopoly  value.  The  Railroad 
Commission  of  Minnesota,  in  making  its  valuation 
of  the  railways  of  that  state,  *  held,  however,  that 
the  appraisal  of  railway  land  should  be  based  on 
the  value  of  adjacent  land  used  for  other  purposes. 

But  how,  railway  men  ask,  can  what  the  farmer 
would  have  to  pay  for  land  properly  be  used  as  a 
factor  in  estimating  what  it  would  cost  to  repro- 

'  Twenty-fourth  Annual  Report  of  the  Railroad  and  Ware- 
house Commission  of  Minnesota,  1908. 

88 


VALUATION    AND    PROFITS 

duce  the  railway?  Suppose  that  adjacent  farm 
land  were  worth  $100  an  acre;  that  the  valuation 
of  an  established  railway  were  made  on  this  basis; 
and  that  afterward  there  was  built  a  new  and  com- 
peting line,  to  which  the  actual  cost  of  land  was 
$200  an  acre.  The  competitive  rates  on  competing 
railways  must  be  the  same.  If  the  rates  of  the 
older  railway  were  to  be  so  fixed  as  to  restrict  it 
to  a  return  on  $100  an  acre,  the  new  railway  would 
have  to  meet  them  and  might  thereby  be  deprived 
of  the  opportunity  to  earn  a  return  on  part  of  its 
actual  investment.  This  would  tend  to  discourage 
new  railway  construction. 

The  Railroad  Commission  of  Washington  met  a 
situation  similar  to  this  when  it  made  its  valua- 
tion of  the  railways  of  that  state.  The  Northern 
Pacific,  many  years  ago,  acquired  land  for  exten- 
sive terminals  on  Puget  Sound  at  a  low  price.  The 
Harriman  lines  recently  built  to  Puget  Sound,  and 
because  of  the  increase  in  the  value  of  land  had  to 
pay  very  much  more  for  it.  The  two  systems  were 
competitors,  and  had  to  make  the  same  competi- 
tive rates.  To  have  based  the  valuation  of  the 
Northern  Pacific's  land  on  its  original  cost,  or  on 
its  estimated  value  for  other  than  railway  pur- 
poses, might  have  prevented  the  Harriman  lines 
from  earning  a  fair  return  on  the  actual  cost  of 
their  land.  The  Commission,  therefore,  based  the 
valuation  of  the  land  of  both  roads  on  its  present 
estimated  cost  of  acquisition  for  railway  purposes. 

89 


TIIK    AMERICAN    TRANSPORTATION    QUESTION 

In  deciding  the  Minnesota  rate  case,  Judge  San- 
born of  the  United  States  Circuit  Court  overruled 
the  Minnesota  Commission  and  held  that  the 
proper  basis  of  valuation  of  land  owned  by  a  rail- 
way and  used  for  transportation  purposes,  is  what 
it  would  now  cost  the  railway  to  acquire  it  for 
those  purposes,  even  though  that  would  be  much 
more  than  it  would  cost  to  acquire  it  for  any  other 
purpose. 

Another  important  point  in  estimating  the  cost 
of  reproducing  the  physical  plants  of  railways,  is 
what  deduction  should  be  made  for  depreciation, 
and  what  addition  should  be  made  for  apprecia- 
tion, in  the  value  of  their  various  parts.  The  mo- 
ment a  rail  or  tie  is  laid,  or  a  signal  tower  or  sta- 
tion is  finished,  it  begins  to  deteriorate,  owing  to 
use,  and  the  ordinarily  insidious,  but  often  violent, 
ravages  of  the  elements.  All  of  the  state  commis- 
sions that  have  made  valuations  of  railways  have, 
to  arrive  at  their  present  value,  made  deductions 
for  depreciation  from  their  estimated  cost  of  re- 
production new.  But,  say  railway  men,  while  the 
depreciation  is  going  on  there  is  also  appreciation 
going  on.  As  soon  as  a  new  line  is  finished  main- 
tenance forces  are  put  to  work,  if  it  is  well  man- 
aged, which  limit  the  depreciation  that  takes  place 
by  making  constant  repairs  and  renewals.  And 
by  their  efforts,  by  the  pressure  and  pounding  of 
trains,  and  the  action  of  sun  and  rain,  of  frost  and 
heat,  of  drought  and  flood,  weaknesses  in  fills  are 

90 


VALUATION   AND    PROFITS 

disclosea  and  remedied,  watercourses  are  estab- 
lished, roadbed  and  embankments  are  solidified, 
and,  throughout  a  period  of  fully  ten  years,  the 
transportation  machine  is  better  and  better  adapted 
to  its  purpose.  Therefore,  an  old  railway  which 
has  been  well  maintained  is  physically  a  more  val- 
uable property  than  a  new  one ;  and,  railway  men 
contend,  if  a  deduction  from  the  cost  of  reproduc- 
tion should  be  made  because  of  depreciation,  an 
addition  to  it  should  be  made  *  because  of  appreci- 
ation. 

According  to  the  widely  accepted  theory,  as 
soon  as  an  estimate  of  the  cost  of  physical  repro- 
duction is  finished,  we  should  go  ahead  and  so  reg- 
ulate rates  on  it  as  to  limit  each  carrier  to  the 
same  return.    But  is  such  an  estimate  a  valuation? 


*  This  contention  was  upheld  by  Circuit  Judge  Sanborn  in 
the  Minnesota  rate  case.  He  said:  "Whether  at  a  given 
time  a  railroad  property  is  more  or  less  valuable  than  it 
would  be  if  it  had  just  been  constructed  is  a  question  of 
fact,  that  in  a  suit  of  this  nature  must  be  answered  by  the 
evidence.  That  evidence  in  this  case  is  that  the  railroads, 
rolling  stock,  and  appurtenances  which  constitute  the  great 
transportation  machines  of  these  companies  in  Minnesota 
are  in  better  condition  for  use,  more  efficient,  more  stead- 
fast, better  adapted  to  each  other,  than  if  their  construc- 
tion was  just  completed,  that  all  depreciation  has  been  off- 
set by  appreciation,  and  that  values  to  the  amounts  here 
allowed  by  the  master  have  been  added  to  the  values  of 
these  properties  new,  by  their  age,  their  repairs,  their  re- 
newals, their  adaptation  and  the  assured  efficiency  that 
comes  from  constant  careful  maintenance  and  operation. 
There  was  no  ei'ror  in  these  allowances." 

91 


THI']    AMERICAN    TRANSPORTATION    QUESTION 

Indubitably,  other  things  being  equal,  a  railway 
having  a  good  physical  plant  is  more  valuable  than 
one  having  a  poor  one.  But,  surely,  the  estimated 
cost  of  reproducing  a  railroad's  plant  is  not  the 
value  of  the  plant;  and  the  value  of  the  plant  is 
not  the  value  of  the  railroad. 

A  railway  through  mountainous  country  might 
be  more  expensive  to  reproduce  than  one  built 
through  easy  prairie  country;  but  the  latter's  plant 
may  be  the  more  valuable,  simply  because  it  is  the 
better  machine  for  rendering  transportation. 

Again,  of  two  roads  having  equally  good  physi- 
cal plants,  that  having  the  larger  net  earnings  is 
plainly  the  more  valuable.  Now,  net  earnings  do 
not  depend  solely  on  rates.  They  are  the  margin 
between  gross  earnings  and  operating  expenses. 
Gross  earnings  depend  not  only  on  the  rates 
charged,  but  on  the  nature  and  density  of  traffic. 
These,  in  turn,  result  largely  from  the  energy  and 
skill  used  by  the  traffic  department  of  the  railway 
in  attracting  population  to  its  lines,  teaching  the 
farmers  how  to  increase  the  productivity  of  the 
soil,  securing  the  opening  of  mines  and  the  loca- 
tion of  factories,  and  so  adjusting  rates  as  to  en- 
able producers  in  the  territory  to  compete  success- 
fully in  the  markets  of  the  entire  country  and  of 
the  world  against  the  producers  in  other  sections 
and  countries.  Whether  operating  expenses  shall 
be  high  or  low  in  proportion  to  gross  earnings  de- 
pends on  the  enterprise  and  skill  used  by  the  man- 

92 


VALUATION    AND    PROFITS 

agement  in  reducing  the  grades  and  eliminating 
the  curvature  in  track,  in  enlarging  terminals,  de- 
veloping esprit  de  corps  among  officers  and  em- 
ployees, increasing  shop  efficiency,  augmenting 
tonnage  per  car  and  per  train  load,  and  in  a  hun- 
dred other  elements  of  good  management,  A  road 
whose  traffic  is  large  and  w^hose  operating  ex- 
penses are  relatively  small,  obviously  would  have 
larger  net  earnings,  and,  therefore,  be  a  more  val- 
uable property,  than  a  road  on  which  the  traffic  is 
relatively  small  and  the  operating  expenses  rela- 
tively high,  on  any  basis  of  rates  whatever  that 
might  be  applied  on  both.  The  Union  Pacific  and 
the  Denver  &  Rio  Grande,  for  example,  are  com- 
peting lines.  Both  the  average  freight  rate  and 
the»average  passenger  rate  of  the  Union  Pacific  in 
1909  were  a  little  lower  than  those  of  the  Denver 
&  Rio  Grande.  But  owing  to  the  greater  density 
of  traffic  of  the  Union  Pacific  and  its  lower  oper- 
ating expenses  per  unit  of  traffic  handled,  its  net 
earnings  were  $7,308  per  mile,  while  those  of  the 
Denver  &  Rio  Grande  were  but  $2,535  per  mile.^ 

'  The  figures  in  detail  are  as  follows  : 

Union  Denver  <6 

Pacific.  Rio  Grande. 
(Year  ending  June  30, 1909) 

Average  rate  per  passenger  per  mile 1.959  cents.  1.997  cents. 

Average  rate  per  ton  per  mile 1.004  cents.  1.305  cents. 

Passenger  traffic  density  per  mile,  passenger  miles       150,036  94,525 

Freight  traffic  density  per  mile,  ton  miles 992,746  458,206 

Gross  earnings  per  mile $14,198  $8,238 

Operating  expenses  per  mile $6,890  $5,703 

Net  earnings  per  mile $7,308  $2,535 

It  will  be  noted  that  the  operating  expenses  of  the  Union 
93 


Til  10    AMIORICAN    TRANSPORTATION    C^UKSTION 

Althoiit;-h  thoir  rates  were  practically  the  same, 
if  you  capitalize  their  net  earnings  at  7  per  cent, 
you  get  a  valuation  of  $102,312  per  mile  for  the 
Union  Pacific  and  one  of  only  $35,490  for  the  Den- 
ver &  Rio  Grande.  As  it  renders  more  service  to 
the  public  and  earns  more  money  for  its  own- 
ers, the  road  having  the  greater  density  of  traffic 
and  the  proportionately  lower  operating  expenses 
is  the  more  valuable  to  both.  Is  it  not,  therefore, 
entitled  to  the  higher  valuation? 

Large  traffic  and  relatively  low  operating  ex- 
penses are  strong  evidences  of  good  management. 
If  valuation  were  based  entirely  on  the  cost  of 
physical  reproduction,  and  the  net  earnings  of 
each  road  could  be,  and  were,  limited  to  the  same 
amount,  the  better  managed  roads  would  be  de- 
prived of  the  fruits  of  their  good  management. 

As  a  matter  of  fact,  such  regulation  probably 
v/ould  be  entirely  impracticable;  for  the  competi- 
tive rates  on  different  roads  must  be  the  same; 
and,  owing  to  the  differences  in  density  of  traffic 

Pacific  were  absolutely  larger  per  mile  than  those  of  the 
Denver  &  Rio  Grande,  although  smaller  in  proportion  to 
gross  earnings.  If  the  Denver  &  Rio  Grande's  equipment, 
roadway  and  structures  had  been  as  well  maintained  as  those 
of  the  Union  Pacific,  its  operating  expenses  would  have 
been  much  larger  and  its  net  earnings  much  smaller.  A 
similar  contrast  could  be  made  between  roads  in  any  part 
of  th(!  country  ;  for  example,  in  the  Middle  West,  between 
the  ('hicago  Great  Western,  on  the  one  hand,  and  the  Chi- 
cago &  North-Western  and  the  Chicago,  Burlington  &  Quincy 
on  the  other. 

94 


VALUATION    AND    PROFITS 

and  operating  expenses,  no  two  roads  charging 
the  same  rates  could  be  made  to  earn  the  same 
percentages  on  their  valuations.  The  theory  that 
rates  should  be  based  on  physical  valuation  alone 
assumes  that  the  percentage  of  net  earnings  on 
the  physical  valuation  is  the  measure  of  the  rea- 
sonableness of  the  rates.  As  on  the  same  rates 
one  road  might  earn  very  much  more  than  what 
might  be  considered  a  "fair  return,"  and  another, 
having  a  relatively  lighter  traffic  and  relatively 
higher  operating  expenses,  much  less,  it  would 
follow,  on  this  theory,  that  the  same  rates  might 
be  at  once  both  reasonable  and  unreasonable !  The 
road  having  the  larger  percentage  of  net  earnings 
might,  by  less  skillful  management,  so  reduce  its 
density  of  traffic  and  increase  its  operating  ex- 
penses as,  without  any  change  in  the  rates,  to  re- 
duce its  net  earnings  to  a  "fair  return."  On  the 
theory  in  question,  this  would  make  reasonable 
the  rates  which  previously,  as  to  it,  were  unrea- 
sonable. A  theory  so  easily  susceptible  of  a  re- 
ductio  ad  absurdum  cannot  be  entirely  correct. 

The  Supreme  Court  of  the  United  States  has 
clearly  held  that  the  value  of  a  railway  consists 
not  merely  in  its  physical  plant  but  also  in  the  ac- 
tual use  and  usefulness  of  the  property.  It  said 
in  a  railway  tax  case: * 

But  the  value  of  property  results  from  the  use  to 

'  C.  C.  C.  &  St.  L.  vs.  Backus,  154  U.  S..  445. 
95 


tup:    AMERICAN    TRANSPORTATION    QUESTION 

which  it  is  put  and  varies  with  the  profitableness  of 
that  use,  present  and  prospective,  actual  and  antici- 
pated. There  is  no  pecuniary  value  outside  of  that 
which  results  from  such  use.  Will  it  be  said  that  the 
taxation  must  be  based  simply  on  cost  when  never  was 
it  held  that  cost  of  a  thing  is  the  test  of  its  value? 
Suppose  there  be  two  bridges  over  the  Ohio,  the  cost 
of  construction  of  each  being  the  same,  one  between 
Cincinnati  and  Newport,  and  the  other  20  miles  below, 
where  there  is  nothing  but  a  village  on  either  shore. 
The  value  of  the  one  will,  manifestly,  be  greater  than 
that  of  the  other,  and  that  excess  of  value  will  spring 
solely  from  the  larger  use  of  the  one  than  of  the  other. 

The  advocates  of  exclusively  physical  valuation 
rely  for  legal  support  mainly  on  the  decision  of 
the  Supreme  Court  of  the  United  States  in  the  Ne- 
braska rate  case.'  But  Justice  Harlan,  in  the 
opinion  of  the  court  in  that  case,  mentioned  not 
only  the  cost  of  original  construction  and  perma- 
nent improvements  and  the  cost  of  reproduction  as 
factors  to  be  considered,  but  also  the  amount  and 
market  value  of  stocks  and  bonds  outstanding, 
the  sum  required  to  meet  operating  expenses,  and 
the  probable  earning  capacity  of  the  pi'operty  un- 
der the  particular  rates  prescribed  by  statute. 
The  probable  earning  capacity  of  the  property  un- 
der any  rates  depends  on  the  nature  and  density 
of  the  traffic.    Here,  therefore,  we  have,  by  direct 


'  Smythe  vs.  Ames,  169  U.  S. ,  466. 
96 


VALUATION   AND    PROFITS 

implication,  a  ruling  of  the  Supreme  Court  that 
the  density  and  nature  of  the  traffic  and  the  op- 
erating expenses  must  be  considered  in  making  a 
valuation. 

While  it  is  easily  shown  that  of  two  railways 
with  equally  good  physical  plants,  that  having 
the  relatively  larger  business  and  the  relatively 
lower  operating  expenses  is  the  more  valuable,  the 
value  of  a  difference  in  volume  or  quality  of  traffic, 
or  in  operating  expenses,  cannot  be  expressed  in 
terms  of  money  until  it  emerges  in  net  earnings; 
and  it  can  only  emerge  in  net  earnings  after  rates 
expressed  in  money  have  been  applied  to  the  traf- 
fic. But  there  is,  perhaps,  a  way  in  which,  while 
using  physical  valuation  as  a  basis  for  regulating 
rates  and  profits,  we  might  secure  to  each  road 
the  benefit  of  every  element  entering  into  its  total 
value  as  a  going  concern. 

It  might  be  found,  if  a  general  physical  valua- 
tion were  made,  that  some  roads  could  not  earn  a 
fair  return  on  their  valuations  without  charging 
rates  which  would  interfere  with  the  movement 
and  growth  of  traffic.  They  would  have  to  be  de- 
nied it,  for,  as  has  already  been  said,  the  right  of 
a  railway  to  earn  any  return  is  subordinate  to  the 
right  of  shippers  and  travelers  to  reasonable  rates. 

Just  above  this  class  of  railways  would  be  found 
others  in  all  parts  of  the  country,  which  would, 
perhaps,  be  barely  able,  with  rates  that  would  not 
oppress  the  traffic,  to  earn  the  current  rate  of  in- 

97 


PI  IK    AMERICAN    TRANSPORTATION    QUESTION 

terest  on  the  estimated  cost  of  physically  repro- 
ducing them.  The  courts  have  indicated  that  if  a 
railway,  without  levying  exorbitant  charges,  can 
earn  a  "fair  return"  on  the  "fair  value"  of  its 
property  it  cannot  be  denied  the  opportunity  to  do 
so;  this  would  be  confiscation.  They  would  hardly 
hold  in  any  case  that  the  cost  of  reproducing  the 
physical  property  exceeded  the  fair  value  of  such 
a  railway;  or  that  the  current  rate  of  interest  ex- 
ceeded a  fair  return.  It  would  seem,  therefore, 
that  railways  of  this  class  could  not  be  restricted 
to  less  than  the  current  rate  of  interest  on  their 
physical  valuations. 

Still  above  them  would  be  found  roads,  which, 
on  the  same  rates,  could  earn  more,  and  in  some 
cases  much  more,  than  the  current  rate  of  interest 
on  their  physical  valuations.  Should  they  be  per- 
mitted to  do  so?  While  they  would  earn  larger 
percentages  of  return  on  their  physical  value,  their 
percentages  of  return  on  their  total  value,  including 
their  physical  value  and  their  utility  to  the  public 
and  to  their  owners,  as  evidenced  by  the  amount 
of  business  that  they  handled  and  the  economy  and 
efficiency  with  which  they  handled  it,  might  be  no 
larger.  Even  if  some  railways  did  earn  large 
profits  this  might  not  be  proof  that  their  rates 
were  excessive.  The  fact  that  other  ordinarily 
well  and  prudently  managed  roads  in  the  same  ter- 
ritory, charging  the  same  rates,  earned  no  more 
than  a  fair  return  on  the  physical  value  of  their 

98 


VALUATION    AND    PROFITS 

properties  would  be  evidence  that  the  rates  were 
reasonable  and  that,  therefore,  the  more  prosper- 
ous roads  were  entitled  to  their  large  profits.  The 
Supreme  Court  of  the  United  States  has  never 
held  that  a  railway  is  not  entitled  to  earn  more 
than  a  fair  return.  What  it  has  held,  in  Smythe 
vs.  Ames  and  other  cases,  is  that  a  public  service 
corporation,  so  long  as  it  does  not  charge  unrea- 
sonable rates,  cannot  be  restricted  to  less  than  this. 
Justice  Brewer  in  Cotting  vs.  Goddard,^  a  case  in- 
volving the  rates  of  a  stock  yards  company,  said: 

As  to  parties  engaged  in  a  public  service,  while  the 
power  to  regulate  has  been  sustained,  negatively  the 
(Supreme)  Court  has  held  that  the  legislature  may  not 
prescribe  rates,  which,  if  enforced,  would  amount  to 
confiscation  of  property.  But  it  has  not  held  that  the 
legislature  may  enforce  rates  that  stop  only  this  side 
of  confiscation. 

In  another  part  of  the  same  opinion  he  said: 

But  it  does  not  follow,  therefore,  that  the  legisla- 
ture has  power  to  reduce  any  reasonable  charges  be- 
cause by  reason  of  the  volume  of  business  done  by  the 
party  he  is  making  more  profit  than  others  in  the  same 
business.  .  .  .  The  amount  of  the  aggregate  profits 
may  be  a  factor  in  considering  the  reasonableness  of 
the  charges,  but  it  is  only  one  factor  and  is  not  that 
which  finally  determines  the  question  of  reasonable- 
ness. 

'183U.  S.,  75. 
99 


THE    AMERICAN    TRANSPORTATION    QUESTION 

Nor  have  the  courts  ever  held  that  the  current 
rate  of  interest  or  any  other  specified  percentage 
is  a  "fair  return"  under  all  circumstances.  The 
Supreme  Court  in  the  Consolidated  Gas  case*  said: 

There  is  no  particulai-  rate  of  compensation  which 
must,  in  all  cases  and  in  all  parts  of  the  country,  be 
regarded  as  sufficient  for  capital  invested  in  business 
enterprise.  Such  compensation  must  depend  greatly 
on  circumstances  and  locality;  among  other  things, 
the  amount  of  risk  in  the  business  is  a  most  important 
factor,  as  well  as  the  locality  where  the  business  is 
conducted,  and  the  rate  expected  and  usually  realized 
there  upon  investments  of  a  somewhat  similar  nature 
with  regard  to  the  risk  attending  them.  There  may 
be  other  matters,  which,  in  some  cases,  might  also  be 
properly  taken  into  account  in  determining  the  rate 
which  an  investor  might  properly  expect. 

The  Supreme  Court  held  in  this  case  that  the 
Consolidated  Gas  Company,  the  risk  in  the  invest- 
ment in  which  was  pronounced  very  small,  was 
entitled  to  6  per  cent. 

The  United  States  Circuit  Court  in  the  Minne- 
sota rate  case  held  that  the  railways  in  Minnesota 
were  entitled  to  7  per  cent.,  saying: 

To  deprive  them  of  such  a  return  would  prevent  ad- 
vances and  tend  to  compel  reductions  in  the  wages  and 
salaries  of  their  employees,  would  tend  to  prevent  the 
extension    of   their  lines   into   portions  of   the  state 


'Wilcox  vs.  Consolidated  Gas  Company,  212  U.  S.,  19. 
100 


VALUATION    AND   PROFITS 

where  the  development  and  accommodation  that  rail- 
road service  assures  would  be  welcome  and  may  be 
needed,  to  deteriorate  the  character  of  the  service  they 
render,  and  to  retard  the  general  prosperity.  The 
legal  rate  of  interest  on  a  debt  in  Minnesota,  in  the 
absence  of  contract,  is  6  per  cent.,  and  by  contract  it 
may  be  10  per  cent,  per  annum.  Rational  investments 
in  agricultural,  manufacturing,  mercantile,  and  other 
industrial  pursuits,  and  even  well-secured  loans,  yield 
returns  in  Minnesota  corresponding  with  these  lawful 
rates.  Investments  in  railroads  and  the  returns  there- 
on are  at  the  risk  of  failures  and  partial  failures  of 
crops,  of  the  disasters,  delays,  and  expenses  of  unusu- 
al storms,  snow  and  cold,  of  the  great  financial  disas- 
ters which  occasionally  prevent  or  delay  the  movement 
of  traffic,  and  of  the  burden  of  continuous  operation, 
whether  profitable  or  unremunerative.  It  is  an  axiom 
in  economics  that  the  greater  the  risk  the  greater 
must  the  return  be  upon  invested  capital,  and  the  con- 
clusion is  irresistible  that  a  net  return  of  7  per  cent, 
per  annum  upon  the  respective  values  of  the  properties 
of  these  companies  in  Minnesota  devoted  to  transpor- 
tation is  not  more  than  the  fair  return  to  which  they 
are  entitled  under  the  Constitution  of  the  United 
States. 

Letting  the  more  successfully  managed  roads 
earn  more  than  the  less  successfully  managed 
w^ould  tend  to  foster  eflScient  management  on  all ; 
no  stimulus  to  the  use  of  enterprise  and  skill  is  so 
potent  as  allow^ing  enterprise  and  skill  to  garner 
and  enjoy  the  fruits  that  they  have  nurtured. 
8  101 


THE    AMERICAN    TRANSPORTATION    QUESTION 

Wages  are  the  compensation  labor  receives  for 
its  services.  Profits  are  the  compensation  invest- 
ors in  railways  receive  for  their  public  service  in 
furnishing  transportation.  There  has  been  much 
discussion  recently  of  the  subject  of  "scientific 
management."  The  managements  of  the  rail- 
ways, and  of  other  concerns,  have  been  criticised 
for  not  more  generally  applying  its  principles  to 
their  operations.  Now,  fundamentally,  scientific 
management  consists  in  adopting  such  conditions 
of  employment,  and  such  schemes  of  compensation 
for  labor,  as  will  secure  for  the  employee  and  the 
employer  the  maximum  returns  for  a  given  ex- 
penditure of  energy  by  the  employee  and  a  given 
investment  of  capital  and  expenditure  in  wages 
by  the  employer.  The  principal  means  to  these 
ends  commonly  used  is  to  fix  a  standard  wage  less 
than  which  no  employee  will  be  paid,  and  to  then 
pay  extra  wages  for  the  exertion  by  employees  of 
more  than  average  skill  and  energy,  these  extra 
wage  payments  being  so  adjusted  that  as  a  result  of 
them  the  employer  will  get  each  unit  of  the  prod- 
ucts of  labor  at  a  smaller  cost.  The  idea  is  that 
both  employee  and  employer  receive  the  largest 
benefits  from  their  joint  endeavors  when  each  em- 
ployee is  paid  in  proportion  to  the  quality  and 
quantity  of  the  work  that  he  does.  Opposed  to 
this  scheme  of  scientific  management  is  the  plan 
usually  favored  by  the  leaders  of  the  labor  unions, 
of  paying  the  same  scale  of  wages  to  all  men  doing 

102 


VALUATION    AND    PROFITS 

the  same  kind  of  work,  in  substantial  disregard 
of  the  amount  and  the  quality  of  the  work  that 
they  do.  Those  who  advocate  "scientific  manage- 
ment" condemn  the  labor  union  plan  of  ''each  for 
all  and  all  for  each"  on  the  ground  that  it  does  not 
stimulate,  but  retards,  individual  effort;  and  that 
only  by  stimulating  individual  effort  can  the  cost 
of  production  be  kept  down  to  the  minimum  and 
the  return  to  both  labor  and  capital  be  raised  to 
the  maximum. 

Now,  the  managements  of  railways  and  other 
business  concerns  are  strictly  comparable  to  indi- 
vidual workingmen.  Some  managements  have 
great  ability  and  enterprise ;  some  only  the  ordi- 
nary amount;  some  almost  none.  The  public  oc- 
cupies a  position  analogous  to  the  employer,  and 
the  railway  to  the  employee.  The  public  employs 
the  railways  to  render  the  service  of  transporta- 
tion. As  I  have  shown,  it  would  be  impossible, 
merely  by  regulation  of  rates  on  the  basis  of  valu- 
ation, to  restrict  all  competing  railways  to  the 
same  return,  because,  owing  to  differences  in  the 
operating  expenses,  in  the  density  of  traffic  and  in 
other  characteristics  of  competing  railways,  they 
are  bound,  when  they  charge  the  same  rates,  to 
earn  different  net  amounts.  It  has,  therefore, 
been  suggested  by  one  eminent  economist  that  all 
net  earnings  in  excess  of  a  "fair  return"  be  appro- 
priated by  the  public.  Suppose,  for  example,  that 
a  fair  return  for  railways  in  a  certain  territory 

103 


THE    AMERICAN    TRANSPORTATION    QUESTION 

were  held  to  be  7  per  cent,  and  that  some  of  the 
roads  were  able  to  earn  10  per  cent.  Under  the 
plan  suggested  the  extra  3  per  cent,  would  be 
taken  by  the  public  in  the  foiTn  of  taxes. 

It  is  questionable  if  this  could  constitutionally 
be  done.  It  is  also  questionable  if,  in  case  it  were 
constitutional,  it  should  be  done.  For  this  would 
be  applying  to  railways  the  very  principle  of  com- 
pensation which  those  who  advocate  scientific 
management  oppose  applying  to  the  compensation 
of  labor;  and  its  tendency  would  be  to  deprive 
railway  managements  of  initiative  and  enterprise. 
At  present  improvements  are  undertaken  with  the 
hope  of  increasing  profits,  but  always  with  the 
knowledge  that  their  cost  may  exceed  their  worth. 
A  reduction  of  grades  is  a  permanent  improve- 
ment. It  should  properly  be  charged  to  capital 
account.  Its  two  effects  are  to  reduce  the  cost  of 
running  trains— in  other  words,  to  reduce  operat- 
ing expenses — and  to  increase  fixed  charges  in 
proportion  to  the  investment  involved.  Whether 
it  results  profitably  depends  on  whether  it  reduces 
operating  expenses  or  increases  fixed  charges  the 
more.  If  it  has  the  former  effect  the  road  gains; 
if  the  latter,  it  loses.  Under  the  proposed  policy, 
if  an  attempted  improvement  turned  out  unprofit- 
ably  the  road  would  have  to  pocket  the  loss,  until 
it  could  get  an  increase  in  rates  or  until  the  growth 
of  traffic  made  it  whole;  while  if  it  turned  out 
well  none  of  the  benefit  would  go  to  the  railway's 

104 


VALUATION    AND    PROFITS 

stocKholders  in  increased  dividends,  but  all  would 
go  to  shippers  and  travelers  in  the  form  of  reduced 
rates,  or  to  the  public  in  the  form  of  increased 
taxes.  Under  such  a  policy  railway  managements 
would  not  be  keen  to  undertake  improvements. 
They  would  be  more  apt  to  be  so  inefficient  that 
increases  in  operating  expenses  would  take  place 
which  would  raise  the  cost  of  transportation.' 

The  application  of  the  principles  of  scientific 
management  to  the  railways  would  involve  permit- 
ting them  to  earn  returns  increasing  with,  al- 
though perhaps  not  in  proportion  to,  the  energy 
and  skill  with  which  they  were  managed.  Such  a 
policy  would  be  much  better  adapted  to  fostering 
economical  and  efficient  management  than  one  of 

'  It  will  be  recalled  that  it  was  Mr.  Louis  D.  Brandeis 
who,  appearing  before  the  Interstate  Commerce  Commis- 
sion in  the  so-called  Rate  Advance  Cases  as  counsel  for  cer- 
tain shippers,  contended  that  the  railways  should  get  such 
increased  net  earnings  as  they  might  need  by  augmenting 
the  efficiency  of  their  operations  and  not  by  advancing  their 
rates.  Testifying  subsequently  before  the  Railway  Securi- 
ties Commission,  of  which  President  Hadley  of  Yale  was 
chairman,  and  which  was  created  by  Congress  to  investigate 
the  question  of  whether  the  issuance  of  railway  securities 
should  be  subjected  to  supervision  by  the  government,  Mr. 
Brandeis  made  an  argument  following  the  same  line  that  I 
have  taken  in  the  text.  My  own  discussion  of  the  question, 
as  it  appears  in  the  text,  was  written  before  Mr.  Brandeis' 
testimony  was  given.     Mr.  Brandeis  said : 

"To-day  efficiency  in  management  is  in  danger  of  being 
punished,  whereas  it  should  be  rewarded.  Efficiency  is  nat- 
urally reflected  in  large  net  earnings  ;  and  as  no  ready  means 

105 


rill';  amp:kican  transportation  question 

limiting  all  the  railways  to  the  same  return, 
whether  that  return  were  made  high  or  low.  And 
the  results  would  be  much  more  likely  to  be  bene- 
ficial to  the  public. 

The  total  gross  earnings  of  the  railways  of  the 
United  States  in  the  year  ending  June  30,  1910, 
were  $2,750,667,435;  their  operating  expenses, 
$1,822,630,433.  The  interest  on  their  funded  debt 
may,  perhaps,  be  regarded  as  a  practically  irre- 
ducible amount;  limitation  of  their  profits  can 
affect  only  the  dividends  they  pay.  The  net  divi- 
dends paid  by  them — that  is,  the  dividends  on 
stock  not  owned  by  railways,  but  outstanding  in 
the  hands  of  the  public — were  almost  $294,000,000, 
or  less  than  11  per  cent,  of  their  total  earnings. 

exist  for  determining-  whether  greater  net  earnings  are  due 
to  greater  efficiency  in  management,  or  to  higher  rates, 
large  earnings  are  frequently  accepted  as  evidence  that  rates 
are  too  high,  and  invite  a  demand  for  reduction ;  whereas, 
in  fact,  the  large  earnings  may  be  due  wholly  to  better  judg- 
ment, g-reater  efficiency,  and  economy  in  administration.  To 
take  from  railroad  corporations  the  natural  fruits  of  effi- 
ciency— that  is,  greater  money  rewards — must  create  a  sense 
of  injustice  suffered,  which  paralyzes  effort,  invites  ineffi- 
ciency, and  produces  slipshod  management.  .  .  .  Private 
capital  embarked  in  a  quasi-public  business  ought  to  receive 
compensation  on  a  sliding  scale,  so  that  the  greater  the  ser- 
vice to  the  public,  the  greater  the  profit  to  those  furnishing 
that  service.  We  should  endeavor  to  approximate  results 
similar  to  those  obtained  in  Boston  by  applying  the  sliding 
scale  system  to  the  production  and  sale  of  gas.  There  the 
dividend  to  the  stockholders  rises  as  the  selling  price  to  the 
public  is  reduced." 

106 


VALUATION   AND    PROFITS 

Therefore,  if  their  dividends  were  entirely  wiped 
out  the  public's  bill  for  transportation  could  there- 
by be  reduced  less  than  11  per  cent.,  and  if  they 
were  doubled  its  transportation  bill  would  thereby 
be  increased  less  than  11  per  cent.  The  vast  bulk 
of  the  money  they  collect  from  the  public  is  paid 
out  for  operating  expenses,  which  amount  to  six 
and  one-half  times  as  much  as  their  net  dividends. 
Obviously,  therefore,  there  is  much  more  chance 
for  the  public  to  gain  largely  by  adopting  a  policy 
which  will  tend  to  keep  down  or  reduce  railway 
operating  expenses  than  one  that  will  tend  to  keep 
down  or  reduce  dividends.  Ten  per  cent,  of  the 
operating  expenses  equals  62  per  cent,  of  the  divi- 
dends. The  courts  hold  that  the  railways  cannot 
be  restricted  to  ^ess  than  a  ''fair  return" — say  6  or 
7  per  cent.  Suppose  that  the  public  at  the  same 
time  provides  that  no  railway  shall  have  more  than 
this.  Thus  assured  of  a  minimum  return  and  re- 
stricted to  this  as  a  maximum,  the  railways  would 
be  deprived  of  all  incentive  to  economical  opera- 
tion. This  might  easily  result  in  an  increase  of  10 
per  cent,  in  operating  expenses — or  prevent  a  re- 
duction of  10  per  cent.,  which  comes  to  about  the 
same  thing.  This,  being  shifted  to  the  shoulders 
of  the  public,  would  amount  to  as  much  in  its  ef- 
fects as  a  62  per  cent,  increase  of  dividends.  If, 
on  the  other  hand,  the  public  should  adopt  the  pol- 
icy of  rewarding  each  road  according  to  its  de- 
serts, and  this  should  cause  a  10  per  cent,  reduc- 

107 


TIIR    AMERICAN    TRANSPORTATION    QUESTION 

lion  in  operating  expenses,  the  reduction  in  the 
economic  cost  of  transportation  would  be  equal  to 
a  G2  per  cent,  reduction  in  dividends. 

These  figures  show  conclusively  that  there  is 
much  more  chance  for  the  public  to  gain  largely 
by  stimulating  the  railways  to  adopt  more  econom- 
ical and  efficient  methods  of  operation  than  by  re- 
stricting their  profits;  and  experience  indicates 
that  the  public  would  share  in  the  benefits  of  bet- 
ter management.  It  has  received  a  large  share  of 
the  benefit  of  the  ever-increasing  economy  and 
efficiency  of  railway  operation  in  the  past  in  the 
form  of  reduced  rates,  or  of  rates  which  remained 
nearly  stationary  while  the  wages  of  labor  and  the 
prices  of  commodities  were  generally  rising,  which 
are  equivalent  to  reduced  rates.  If  the  public  pre- 
fers in  future  to  receive  its  share  of  the  benefits 
of  the  growth  of  traffic  and  of  more  efficient  man- 
agement in  the  form  of  higher  taxes,  instead  of 
low  rates,  the  suggestion  that  earnings  in  excess 
of  the  percentage  held  by  the  courts  to  be  a  fair 
return  be  appropriated  in  taxes  might  be  adopted 
in  a  modified  form.  It  might  be  provided— assum- 
ing this  would  be  constitutional,  which  it  probably 
would  not  be--that  all  earnings  in  excess  of,  say, 
7  per  cent,  should  be  divided  equally  between  the 
railway  and  the  public,  the  public's  share  being 
paid  into  the  treasuries  of  the  states  through 
which  each  railway  operates  in  proportion  to  its 
mileage  in  the   diflferent  states.     This  would  be 

108 


VALUATION    AND    PROFITS 

much  better  adapted  to  securing  efficient  and  eco- 
nomical management  than  the  limitation  of  all 
railways  to  the  same  maximum  return.  It  would 
not  tend  to  prevent  all  reductions  in  rates,  for 
many  reductions  so  greatly  stimulate  the  growth 
of  traffic  as  to  increase  net  earnings;  and  the  rail- 
ways would  still  have  an  incentive  to  do  anything 
that  would  increase  their  net  earnings.  It  might 
protect  the  roads  against  some  unreasonable  de- 
mands of  shippers;  for  whatever  reductions  in 
rates  reduced  net  earnings  would  reduce  the  pub- 
lic's share  of  them  as  well  as  the  railway's  share. 
It  is  sometimes  contended  that  after  a  valuation 
is  made  rates  should  be  so  regulated  as  to  restrict 
the  most  prosperous  carriers  to  a  fair  return.  As 
the  competitive  rates  of  competing  railways  must 
be  the  same,  the  result  would  be  either  (1)  to  re- 
strict the  weaker  lines  to  less  than  a  fair  return, 
or  (2)  to  cause  them  to  get  a  fair  return  by  mak- 
ing their  rates  at  non-competitive  points  very 
much  higher  in  proportion  than  their  rates  to  com- 
petitive points.  The  decisions  of  the  courts  seem 
clearly  to  hold  that  so  long  as  a  road  does  not 
make  its  rates  so  high  that  the  traffic  cannot  eas- 
ily move  it  cannot  be  restricted  to  less  than  a  fair 
return.  It  seems  to  follow  that  to  restrict  the 
earnings  of  the  stronger  roads  to  the  so-called 
"fair  return"  would  be,  in  effect,  to  justify  the 
weaker  roads  in  making  their  rates  to  non-compet- 
itive points  relatively  much  higher  than  those  to 

109 


TUK    AMERICAN    TRANSPORTATION    QUESTION 

competitive  points.  Thus  the  proposed  policy 
might  have  the  effect  not  only  of  impairing  rail- 
way efficiency,  but  of  causing  very  injurious  dis- 
criminations against  many  communities.  It  has 
been  one  of  the  main  purposes  of  past  regulation 
to  prevent  such  discriminations. 


CHAPTER    VI 

RAILWAY   VALUATION   AND   PROFITS    {Continued) 

I  HAVE  tried  to  outline  in  the  previous  chapter 
the  only  way  in  which,  it  would  seem,  a  valuation 
could  be  made  which  would  stand  the  test  of  the 
courts,  and  the  only  way  in  which,  apparently,  it 
could  be  used  as  a  basis  for  the  regulation  of  rates 
without  impairing  railway  efficiency  and  injuring 
rather  than  benefiting  the  public.  What  would  be 
the  results  of  an  attempt  to  carry  out  such  a  pol- 
icy is  largely  a  speculative  matter. 

The  making  of  a  valuation  of  our  entire  240,000 
miles  of  railway  would  involve  a  very  heavy  in- 
itial expenditure  by  the  government.  The  ap- 
praisal would  have  constantly  to  be  revised,  for  a 
railway's  value,  owing  to  improvements,  and  vari- 
ations in  the  value  of  its  land,  may  change  greatly 
from  year  to  year;  and,  as  we  have  seen,  the  courts 
hold  that  it  is  the  value  at  the  time  that  the  in- 
quiry is  being  made  regarding  the  rates  that  must 
be  considered.  Therefore,  there  would  have  to  be 
continuing  expenditures  to  keep  the  valuation  up 
to  date.  While  the  initial  valuation  was  in  prog- 
ress investors  and  railway  managers  would  have  a 
feeling  of  some  uncertainty  as  to  the  results  of  its 
making  and  its  use,  which,  like  uncertainty  re- 
garding public  action  affecting  any  large  industry, 
would  tend  to  retard  railway   development  and 

111 


Till']    AMERICAN    TRANSPORTATION    QUESTION 

cause  more  or  less  depression  in  business  in  gen- 
eral. It  is  probable  the  final  results  would  be  sur- 
prising to  most  people.  The  major  premise  in  the 
argument  for  valuation  has  been  that  our  railways 
are  overcapitalized  and  that,  therefore,  the  return 
on  their  capitalization  cannot  be  used  as  one  of  the 
tests  of  the  reasonableness  of  rates.  Some  of  our 
railways  are  overcapitalized — certain  of  them 
grossly  so.  But  on  the  average  they  have  the  low- 
est capitalization  per  mile  of  the  railways  of  any 
first-rate  country  in  the  world,  and  a  much  lower 
capitalization  than  those  of  many  second-rate 
countries.^    They  make  annual  reports  of  the  cost 

'  The  capitalization  (or  costs  of  construction)  per  mile  of 
the  railways  of  the  United  States  and  those  of  some  other 
countries  as  reported  for  the  years  mentioned  are  as  follows : 

United  Kingdom 1908  $275,040 

England  alone 1909  314,000 

German  Empire 1908  109.788 

France 1907  139.237 

Austria 1907  112.875 

Hungary 1907  63.011 

Italy  * 1907-8  124.583  t 

Spain 1905  77.077 

Portugal 1905  113.954 

Sweden 1906  33.678 

Norway 1908  38,458 

Denmark  * 1907-8  50,215 

Belgium 1907  157,298 1 

Holland 1907  86.211 

Switzerland 1907  110.740 

Roumania 1907-8  92.719 

Argentina 1907  59.930 

Japan  * 1908  47.758 

British  India 1908  43.364 

New  South  Wales 1909  63,999 

United  States 1909  59,259 

*  State  only.  f  Capital  1906-1907.  $  Capital,  state  only,  2,543  miles. 

112 


VALUATION    AND    PROFITS 

of  their  road  and  equipment  to  the  Interstate  Com- 
merce Commission,  and  up  to  1909,  this  cost,  as 
reported  for  221,679  miles  of  line,  amounted  to 
$13,451,451,401,  or  $G0,679  a  mile  as  compared 
with  a  net  capitalization  of  $13,711,867,733  for  the 
entire  mileage  of  the  country,  or  $59,259  a  mile. 
Valuations  have  been  made  in  a  number  of  states; 
and  in  Washington,  South  Dakota,  Michigan,  Min- 
nesota and  Wisconsin,  where  the  aggregate  gross 
capitalization  was  $1,210,999,033,  the  aggregate 
estimate  of  the  cost  of  reproduction,  new,  of  the 
mere  physical  properties  made  by  the  state  com- 
missions was  $1,211,806,522. 

The  only  one  of  these  valuations  that  has  been 
put  directly  to  the  test  of  a  court  decision  is  that 
in  Minnesota.  The  capitalization  of  the  railways 
in  Minnesota,  excluding  duplications  due  to  inter- 
corporate ownership  of  securities,  was  $39,496  a 
mile;  the  commission's  estimate  of  cost  of  repro- 
duction, new,  was  $54,201  a  mile,  or  38  per  cent, 
greater.  And,  despite  the  fact  that  the  commis- 
sion's estimate  of  the  cost  of  reproduction,  new, 
was  38  per  cent,  greater  than  the  capitalization, 
Judge  Sanborn  held  in  the  Minnesota  rate  case 
that  it  was  20  per  cent,  too  low  as  to  the  Northern 
Pacific,  the  Great  Northern  and  the  Minneapolis 
&  St.  Louis,  the  roads  directly  involved  in  the 
Minnesota  litigation.  The  aggregate  capitaliza- 
tion of  these  three  roads  in  Minnesota  was  $155,- 
051,909;  the  commission's  estimate  of  their  cost  of 

113 


THE    AMERICAN    TRANSPORTATION    QUESTION 

reproduction  was  $193,094,302;  and  the  valuation 
put  on  them  by  the  court  was  $250,238,300.  If 
Judge  Sanborn's  decision  be  correct,  then  not  only 
the  Minnesota  valuation,  but  all  the  other  valua- 
tions made  have  been  too  low. 

In  view  of  all  these  facts,  there  seems  ground 
for  the  confidence  railway  men  express  that  an  es- 
timate of  the  cost  of  reproducing  the  physical 
properties  of  the  railways  of  the  United  States 
would  equal,  and  probably  greatly  exceed,  their 
outstanding  capitalization.  The  demand  for  valu- 
ation was  started  as  a  means  of  reducing  rates. 
Those  who  started  it  had  no  conception  of  the  ad- 
ditions to  the  values  of  American  railways  that 
have  been  made  by  the  investment  of  earnings  in 
permanent  improvements  and  by  increases  in  the 
value  of  real  estate.  Of  course,  if  a  valuation 
largely  exceeded  the  capitalization  of  the  railways, 
instead  of  legally  justifying  reductions  in  rates,  it 
would  legally  justify  substantial  advances  in  them. 

Even  if  it  did  so  it  might  be  commercially  im- 
practicable for  the  roads  to  take  full  advantage  of 
it.  It  is  very  widely  believed  that  the  railways 
are  not  only  overcapitalized,  but  that  they  have  so 
adjusted  their  rates  as  to  pay  a  return  on  their 
capitalization.  This  is  a  misapprehension.  In 
some  periods  many  have  not  paid  the  interest  on 
their  bonds,  and  have  become  bankrupt.  Never 
have  all  paid  dividends  on  all  their  stock.  In  the 
three  years  1895-1897  inclusive  they  paid  no  divi- 

114 


VALUATION   AND    PROFITS 

dends  on  over  70  per  cent,  of  it.  Not  until  as  re- 
cently as  1901  did  they  pay  dividends  on  50  per 
cent,  of  it.  Even  in  1907,  their  most  prosperous 
year,  they  paid  none  on  33  per  cent,  of  it.  Of 
course,  if  they  based  their  rates  on  their  capitali- 
zation, they  would  have  so  fixed  them  as  to  have 
made  them  yield  a  return  on  this  part  of  their 
stock.  They  have  had  to  make  rates  which  the 
traffic  would  bear,  and  with  which  they  could  meet 
the  competition  of  each  other  and  of  the  water 
carriers.  Thus  conditioned,  they  have  been  un- 
able so  to  adjust  them  as  to  earn  a  return  on  their 
aggregate  capitalization — however  much  they  may 
have  longed  to  do  so.  They  would  be  confronted 
with  similar  conditions  after  a  valuation  was 
made.  The  rates  on  each  commodity  and  for  each 
haul  would  have  to  be  adjusted  as  they  have  been 
in  the  past — that  is,  with  reference  to  what  each 
kind  of  traffic,  according  to  its  value  and  the  com- 
petitive conditions  under  which  it  was  handled, 
could  and  would  bear — and  if  the  aggregate  valua- 
tion of  the  railways,  like  their  aggregate  capitali- 
zation in  the  past,  were  such  that  the  rates  could 
not  be  so  adjusted  as  to  earn  a  return  on  all  of  it, 
the  roads  would  have  to  be  content  without  a  re- 
turn on  parts  of  it. 

It  is  not  meant  to  imply  that  no  advances  would 
be  practicable,  but  merely  that  no  very  great  ad- 
vances might  be  practicable.  No  doubt  consider- 
able advances  on  some  commodities  could   and 

115 


THE    AMERICAN    TRANSPORTATION    QUESTION 

would  be  made.  But  it  must  be  borne  in  mind 
that  if  rates  were  to  be  based  on  valuation,  and 
valuation  were  to  be  based  on  the  cost  of  repro- 
duction of  the  properties,  then  every  increase  in 
the  value  of  the  real  estate  owned  by  the  railways 
would  entitle  their  owners  to  a  larger  minimum 
return.  If  rates  were  raised  accordingly,  a  crush- 
ing burden  might  ultimately  be  imposed  on  the 
commerce  and  industry  of  the  United  States.  The 
effect  would  be  to  hamper  their  development; 
which  would  react  with  great  and  harmful  force 
on  the  earnings  of  the  railways.' 

One  reason,  no  doubt,  why  valuation  has  been 
received  with  such  widespread  favor  as  a  possible 
solution  of  the  problem  of  determining  the  reason- 
ableness of  railway  rates  is  that  in  many  cases  it 
has  served  pretty  well  as  a  basis  for  the  regulation 


'  "At  first  it  was  the  popular  advocate,  the  shrewd  poli- 
tician, who  seized  upon  physical  valuation  as  a  slogan  be- 
cause he  had  heard  so  much  of  watered  securities  that  he 
believed  that  a  valuation  of  railway  property  would  afford 
an  automatic  excuse  for  the  reduction  of  rates.  But  after 
the  first  few  valuations  had  been  made  the  shrewd  politician 
dropped  that  theory  like  a  hot  potato.  The  practice  of  the 
railways  in  the  past  of  putting-  back  into  the  property  t- 
large  a  proportion  of  their  revenues  through  maintenance 
expenses,  and  the  inci-ement  of  real  estate  values  which  the 
railways  claimed  equally  with  the  owner  of  the  corner  lot, 
were  demonstrated  to  have  run  up  the  physical  value  ol' 
most  of  the  railways,  when  ascertained  by  any  fair  system 
of  appraisal,  to  a  figure  which  was  dangerous  to  the  theory 
that  rates  were  too  high  if  based  solely  on  physical  value. 

IIG 


VALUATION    AND    PROFITS 

of  the  rates  of  other  public  utilities.  But  a  rail- 
way differs  from  most  other  public  utilities  in 
several  important  particulars.  It  owns  a  large 
amount  of  real  estate,  while  such  public  utilities 
as  street  railways,  light  and  power  companies  and 
water  works  occupy,  in  the  main,  real  estate 
owned  by  the  public.  An  appraisal  of  one  of  these 
utilities  is,  therefore,  much  simpler  and  easier 
than  a  physical  appraisal  of  a  railroad.  A  public 
utility,  such  as  a  street  railway  or  a  water  works, 
handles  only  one  kind  of  business.  A  railway 
handles  a  great  many  different  kinds  of  traffic 
which  cannot  bear  the  same  rates.  A  public  util- 
ity, such  as  a  street  railway  or  a  water  works, 
usually  has  a  monopoly  in  its  field,  while  steam 
railways  operate  under  varying  physical  condi- 
tions, have  widely  varying  amounts  of  traffic,  and, 
despite  the  fact  of  these  differences  in  conditions, 

So  some  railways  themselves  who  at  first  had  opposed  phys- 
ical valuation,  seized  upon  the  discard  of  the  politician  and 
promoted  it  into  a  ground  for  an  injunction.  But  probably 
this  plea  must  now  be  abandoned  also  by  the  railways.  The 
implacable  logic  of  the  suggestion  that  on  this  theory  as 
values  are  constantly  increasing,  rates  must  also  constantly 
increase,  would  seem  to  put  an  end  to  ratemaking  on  the 
simple  arithmetic  of  physical  valuation,  for  every  student 
of  political  economy  knows  that  railway  rates  in  the  United 
States,  taken  by  and  large,  have,  through  the  operation  of 
general  economic  laws,  gradually  and  steadily  decreased." 
—From  an  address  by  Fairfax  Harrison,  President  Chicago, 
Indianapolis  &  Louisville  Railway,  before  the  Transporta- 
tion Club  of  Indianapolis,  March  31,  1911. 
9  117 


THE    AMERICAN    TRANSPORTATION    QUESTION 

compete  with  each  other  and  with  water  carriers 
at  numerous  points,  and  must  make  their  rates 
with  reference  to  these  competitive  conditions. 
Therefore,  while  making  and  regulating  the  rates 
of  a  street  railway  or  a  water  works  is  a  compara- 
tively simple  matter,  involving  comparatively  few 
and  simple  considerations,  the  making  and  regu- 
lating of  the  rates  of  a  steam  railway,  which  ap- 
ply to  the  carriage  of  passengers  and  of  from  six 
to  ten  thousand  different  commodities  handled  un- 
der widely  varying  conditions,  is  a  highly  complex 
matter.  The  earnings  of  a  public  utility,  such  as 
a  street  railway  or  a  water  works,  do  not  fluctuate 
greatly.  In  the  calendar  year  1908  the  gross  earn- 
ings of  the  railways  of  the  United  States  declined 
$300,000,000,  while  those  of  the  street  railways 
increased. 

While,  therefore,  something  like  mathematical 
exactitude  is  practicable  in  the  regulation  of  other 
utilities  it  does  not  seem  practicable  in  the  regula- 
tion of  railways.  The  making  and  regulation  of 
railway  rates — so  long,  at  least,  as  they  are  owned 
by  different  companies — must  always  be,  not 
merely  an  exercise  in  mathematics,  but  an  exer- 
cise of  judgment  guided  by  a  thorough  knowledge 
of  economic  principles  and  commercial  and  trans- 
portation conditions. 

It  may  be  advisable,  as  a  matter  of  public  policy, 
to  ascertain  the  probable  cost  of  reproducing  the 
physical  properties  of  the  railways.    This  would 

118 


VALUATION   AND    PROFITS 

satisfy  the  public  as  to  whether  or  not  they  are 
earning  excessive  returns.  But  whether  a  valua- 
tion be  made  or  not,  we  must  continue  to  deter- 
mine the  reasonableness  of  specific  rates  precisely 
as  railway  men  and  intelligent  railway  regulating 
authorities  have  heretofore;  and  it  might  be 
wiser,  instead  of  making  a  valuation  and  using  it 
as  a  measure  of  the  reasonableness  of  rates  as  a 
whole,  whether  those  of  one  road  or  of  all  the  roads 
of  the  country,  to  judge  of  the  reasonableness  of 
entire  schedules  of  rates  in  the  future,  as  econo- 
mists have  in  the  past — that  is,  by  noting  their 
effects  on  the  movement  and  growth  of  traffic ;  by 
comparing  them,  making  allowances  for  differ- 
ences of  conditions,  with  the  rates  on  other  rail- 
ways in  this  and  other  countries;  by  comparing 
the  capitalizations  of  the  railways  whose  rates  may 
be  in  question — allowances  again  being  made  for 
differences  in  conditions— with  the  capitalizations 
of  other  railways  in  this  and  other  countries;  and 
by  comparing  their  returns  with  the  returns 
earned  by  other  railways  similarly  situated,  and 
in  other  industries.  If,  in  view  of  these  consider- 
ations, the  rates  of  a  railway,  or  a  group  of  rail- 
ways, seem  unreasonably  high,  perhaps  they 
should  be  reduced;  and  if  they  seem  unreasonably 
low,  perhaps  they  should  be  allowed  to  be  ad- 
vanced. 

Personally,  it  seems  to  me  that  very  exagger- 
ated prominence  has  been  given  in  recent  years  to 

119 


THE    AMERICAN    TRANSPORTATION    (QUESTION 

the  question  of  the  basis  on  which  rates  as  a  whole 
should  be  regulated.  I  believe  this  for  two  rea- 
sons. First,  all  my  comparisons  of  rates  in  this 
and  other  countries  have  led  to  the  conclusion  that 
rates  here,  on  the  average,  are  relatively  low. 
Second,  as  I  have  pointed  out,  the  deteiTni nation 
of  what  profits  the  railways  shall  be  allowed  to 
earn  is  apt  to  have  comparatively  little  influence 
in  determining  how  high  or  how  low  their  rates 
shall  be.  The  dividends  on  their  stock  amounted 
in  1910  to  but  16  per  cent,  of  their  operating  ex- 
penses. It  is,  therefore,  from  the  standpoint  of 
those  who  pay  the  rates,  almost  seven  times  as 
important  that,  by  efficient  and  economical  man- 
agement, their  operating  expenses  shall  be  kept 
down  as  that  their  dividends  shall  be  kept  down. 
The  great  desideratum  is  the  working  out  of 
seme  permanent  policy  which  will  tend  to  secure 
to  the  public  the  best  practicable  service  at  the 
lowest  rates  practicable  for  such  service.  This 
end  is  much  less  apt  to  be  attained  by  a  policy  of 
restrictive  regulation  which  will  tend  to  keep  the 
railways  and  the  people  at  loggerheads  than  by  a 
policy  of  cooperative  regulation — that  is,  by  some 
policy  which  will  give  the  railways  an  incentive 
to  good  management  and  will  cause  the  results  of 
their  good  management  to  be  equitably  divided 
between  the  people  and  their  owners.  The  rail- 
way managers  have  more  to  gain  for  the  owners 
by  following  a  course  that  tends  to  promote  the 

120 


VALUATION    AND    PROFITS 

interests  of  both  the  owners  and  the  public  than 
by  following  one  that  tends  to  promote  the  inter- 
est of  the  owners  at  the  expense  of  the  public. 
Similarly,  the  public  has  more  to  gain  by  adopting 
a  policy  that  will  tend  to  benefit  both  the  owners 
of  the  railways  and  the  public  than  by  adopting 
one  designed  to  promote  the  interests  of  the  pub- 
lic at  the  expense  of  the  owners. 

Conditions  may  change,  but  for  the  present  it 
would  seem  that  the  best  course  for  the  public  to 
take  is  to  cause  public  authorities  to  so  regulate 
rates  as  to  establish  equitable  relations  between 
them;  to  exercise  some  control  over  the  issuance 
of  railway  securities  mainly  to  see  that  none  in 
future  are  issued  except  for  cash  or  its  equivalent, 
and  that  the  money  derived  from  them  is  honestly 
invested  in  the  properties;  and  then  to  let  each 
railway  earn  such  return  as  it  can,  so  long  as  the 
average  return  of  any  particular  group  of  rail- 
ways, or  of  the  railways  as  a  whole,  does  not  ex- 
ceed the  ordinary  rate  of  commercial  return  in  the 
territories  where  they  do  business.  Under  this 
plan  some  railways  would  earn  very  large  returns 
on  their  capitalizations;  but  if  other  railways  op- 
erating in  the  same  territory  and  charging  the 
same  rates  were  barely  able  to  earn  only  the  cur- 
rent rate  of  interest  on  as  low  or  lower  capitaliza- 
tions, this  would  be  strong  evidence  that  the  pros- 
perity of  the  more  prosperous  roads  resulted 
largely  from  better  management;  that  they  were 

121 


TIIK    AMERICAN     TRANSPORTATION    QUESTION 

entitled  to  their  larger  returns;  and  that  it  was 
expedient  for  the  public  to  let  them  enjoy  them. 
This  scheme  of  regulation  does  not  appeal  so 
strongly  to  minds  loving  mathematical  exactitude 
as  does  the  plan  of  making  a  valuation  and  fixing 
the  precise  percentage  of  profit  on  it  that  each 
railway  shall  be  allowed  to  earn;  but  it  is  more 
feasible  and  better  adapted  to  secure  to  the  public 
in  the  long  run  low  and  equitable  rates  and  good 
service. 

Note. — While  the  proofs  of  the  text  were  being  read  the 
report  of  the  Railroad  Securities  Commission  to  President 
Taft  was  made  public.  This  Commission  was  created  to 
study  and  report  on  the  question  of  regulation  of  railway- 
securities  by  the  federal  government.  It  included  within 
the  scope  of  its  investigation  the  matters  of  valuation  and 
limitation  of  profits.  The  reasoning  in  its  report  and  the 
conclusions  reached  are  very  similar  to  those  in  the  text. 
The  Commission  was  composed  of  Arthur  T.  Hadley,  Presi- 
dent of  Yale  University ;  Frederick  N.  Judson,  a  distin- 
guished lawyer  and  author  of  "Judson  on  Interstate  Com- 
merce" ;  Frederick  Strauss,  a  member  of  a  great  private 
banking  firm;  Walter  L.  Fisher,  Secretary  of  the  Interior; 
and  Balthasar  H.  Meyer,  a  member  of  the  Interstate  Com- 
merce Commission.  The  Securities  Commission  favored 
giving  the  Interstate  Commerce  Commission  "broad  powers 
and  adequate  means  for  valuation  of  the  physical  property 
of  railroads  as  one  element  in  determining  fair  value,  when- 
ever, in  the  judgment  of  that  Commission,  this  is  of  suf- 
ficient importance  to  warrant  such  action.  .  .  .  The  attempt 
to  oppose  a  system  of  physical  valuation  of  this  kind  tends 
to  give  countenance  to  exaggerated  estimates  of  the  amount 
of  water  in  railroad  stocks."  "It  is  hardly  necessary  to 
add,"  the  Commission  said,  "that  your  Commission  does 
not  believe  that  the  cost  of  reproduction  of  the  physical 

122 


VALUATION    AND    PROFITS 

properties,  however  carefully  computed,  is  the  sole  element 
to  be  considered  in  determining  the  present  value  of  a  rail- 
road, or  that  the  outstanding  securities  could  or  should  be 
made  to  conform  to  any  such  arbitrary  standard." 

In  another  place  the  Commission  said:  "No  attempt 
should  be  made  by  statute  to  limit  railroad  profits  to  a  fixed 
percentage,  or  to  treat  a  high  cash  dividend  as  necessarily 
indicating  extortion.  Railroad  charges  must  be  reasonable ; 
but  to  try  to  control  rates  by  arbitrarily  limiting  profits  is 
to  put  the  manager  vi^ho  makes  his  profit  by  eflSciency  and 
economy  on  the  same  level  as  the  one  w^ho  tries  to  accomplish 
the  same  result  through  extortionate  charges.  .  .  .  We  hear 
much  about  a  reasonable  return  on  capital.  A  reasonable 
return  is  one  which  under  honest  accounting  and  responsible 
management  will  attract  the  amount  of  investors'  money 
needed  for  the  development  of  our  railroad  facilities.  More 
than  this  is  an  unnecessary  public  burden.  Less  than  this 
means  a  check  to  railroad  construction  and  to  the  develop- 
ment of  trafl!ic.  Where  the  investment  is  secure,  a  reason- 
able return  is  a  rate  which  approximates  the  rate  of  interest 
which  prevails  in  other  lines  of  industry.  Where  the  future 
is  uncertain  the  investor  demands,  and  is  justified  in  de- 
manding, a  chance  of  added  profit  to  compensate  for  his 
risk.  We  cannot  secure  the  immense  amount  of  capital 
needed  unless  we  make  profits  and  risks  commensurate.  If 
rates  are  going  to  be  reduced  whenever  dividends  exceed 
current  rates  of  interest,  investors  will  seek  other  fields 
where  the  hazard  is  less  or  the  opportunity  greater.  In  no 
event  can  we  expect  railroads  to  be  developed  merely  to  pay 
their  owners  such  a  return  as  they  could  have  obtained  by 
the  purchase  of  investment  securities  which  do  not  involve 
the  hazards  of  construction  or  the  risks  of  operation." 


CHAPTER  VII 

RAILWAY    EFFICIENCY    FROM    THE    STANDPOINT 
OF   ECONOMY 

The  public  is  always  concerned  as  to  the  effi- 
ciency with  which  our  railways  are  operated.  The 
railway  system  of  the  United  States  is  the  great- 
est in  point  of  mileage,  of  investment  represented, 
and  of  traffic  handled  in  the  world.  That  public 
sentiment  in  this  country  is  still  opposed  to  public 
ownership  is  due  to  the  fact  that  it  is  believed 
that  government  ownership  might  endanger  our 
political  institutions  and  that  private  management 
of  this  great  railway  system  is  more  efficient  than 
public  management  would  be.  If  it  should  be 
shown  that  under  private  ownership  the  operation 
of  our  railways  is  relatively  inefficient,  either  as 
compared  with  what  it  ought  to  be,  or  as  com- 
pared with  that  of  railways  in  other  countries 
which  are  owned  and  operated  by  the  state,  this 
would  be  a  strong  reason  for  a  change  in  public 
sentiment  regarding  the  best  railway  policy  for 
us  to  follow.^    For  inefficient  management  makes 

'  Public  interest  in  the  question  of  the  efficiency  with 
which  railway  transportation  in  the  United  States  is  con- 
ducted has  been  greatly  intensified  recently  by  testimony  in- 
troduced at  the  hearings  before  the  Interstate  Commerce 

124 


EFFICIENCY   AND   ECONOMY 

operation  needlessly  expensive;  and,  in  the  long 
run,  whatever  tends  to  increase  the  cost  of  opera- 
tion tends  to  increase  the  rates  that  the  public 
must  pay  for  the  transportation  service. 

Any  intelligent  consideration  of  the  question  as 
to  whether  any  railway  or  group  of  railways  is 
efficiently  managed  must  be  preceded  by  definition 
of  what  is  meant  by  "efficiency."  The  word  is 
quite  commonly  used  in  discussions  of  railway 
affairs  as  if  it  were  synonymous  with  "economy." 
But  economy  is  not  the  same  thing  as  efficiency. 
The  public  demands,  and  properly,  that  the  rail- 
ways shall  not  only  be  economically  operated,  but 
that  they  shall  give  good  service.  Efficient  opera- 
tion may,  therefore,  properly  be  defined  as  the 
rendering,  as  economically  as  may  be  practicable 
in  the  circumstances,  of  such  service  as  best  fur- 
thers the  public  convenience  and  welfare. 

The  railway  managers  have  reached  pretty  ac- 
curate conclusions  as  to  the  most  economical  speed 
to  run  any  given  train  with  an  engine  of  any  given 
tractive  power.  But  this  most  economical  speed 
may  be  so  slow  as  to  be  inefficient  for  shippers 


Commission  in  1910  in  the  so-called  "rate  advance"  cases  to 
show  that  they  might  be  operated  with  much  greater  effi- 
ciency. Mr.  Louis  D.  Brandeis,  a  prominent  Boston  lawyer 
who  was  counsel  for  some  of  the  shippers  in  these  cases,  as- 
serted that  by  the  adoption  of  so-called  "scientific  manage- 
ment" the  roads  could  save  a  million  dollars  a  day,  and  a 
number  of  professional  efficiency  engineers  gave  evidence  in 
support  of  this  view. 

125 


TIIH    AMP]RICAN    TRANSPORTATION    QUESTION 

who  wish  their  goods  rapidly  transported  to  their 
destination.  Mere  economy  may  be  hauling  cars 
loaded  to  their  maximum  capacity  and  running 
trains  with  enough  cars  to  utilize  the  engine's  full 
tractive  power.  But  good  service  is  incompatible 
with  holding  cars  and  trains  at  terminals  until 
each  can  be  loaded  to  its  capacity.  The  commer- 
cial organizations  in  several  cities,  including  New 
York,  Pittsburgh,  Chicago  and  St.  Louis,  have 
within  recent  years  got  the  railways  to  put  on 
many  "package  cars"  which  run  from  these  cities 
to  numerous  points  over  a  wide  area  on  regular 
schedules.  When  the  time  comes  for  one  of  them  to 
go  it  must  start  whether  it  contains  40,000  pounds 
of  merchandise  or  4,000  pounds.  Therefore,  their 
average  lading  is  small.  From  the  standpoint 
merely  of  economy  this  is  inefficient  operation; 
but  the  shipper  considers  it  efficient  operation, 
because  it  is  good  service. 

Similarly,  in  the  passenger  service  economical 
operation  would  consist  of  loading  each  car  to  its 
reasonable  capacity  and  running  just  enough  well- 
loaded  trains  to  handle  the  available  business. 
But  true  efficiency  of  operation  involves  such  fre- 
quent train  service  that  the  average  number  of 
passengers  hauled  per  train  in  the  United  States 
in  the  year  ending  June  30,  1909,  was  only  54,  or 
less  than  enough  to  fill  an  average  day  coach. 

If  one  is  disposed  to  question  wiiether  speed  and 
safety  are,  from  the  standpoint  of  the  public,  as 

126 


EFFICIENCY   AND    ECONOMY 

important  elements  in  efficiency  of  operation  as 
economy  let  him  consider  what  is  taking  place 
daily  on  our  railways.  They  have  over  2,135,000 
freight  cars.  Perhaps  one-half  of  these  are  al- 
ways under  load.  The  average  value  of  their 
loads  is  perhaps  $500.^  There  is,  then,  at  any 
given  time  about  $530,000,000  worth  of  goods  in 
transit.  The  average  rate  of  commercial  profit  in 
this  country  is  perhaps  12  per  cent.,  and  12  per 
cent,  on  goods  of  this  amount  is  over  $60,000,000 
a  year.  The  more  speedily  these  goods  are  moved 
the  smaller  is  the  economic  loss  on  them  from 
their  being  kept  unavailable  for  use,  sale  or  con- 
sumption. Nor  is  this  all.  The  manufacturer  need 
keep  on  hand  smaller  quantities  of  raw  materials, 
and  the  jobber  and  retail  merchant  smaller  stocks 
of  goods  if  each  knows  that  when  he  places  an  or- 
der he  can  rely  on  the  railway  to  bring  it  to  him 
within  a  time  both  short  and  certain.  To  what- 
ever extent  speedy  and  dependable  transportation 
releases  capital  that  otherwise  must  be  kept  tied 
up  in  goods  in  transit,  in  manufacturers'  raw  ma- 
terials and  in  jobbers'  and  retailers'  stocks,  to 
that  extent  it  increases  the  amount  of  capital 
available  for  other  uses. 

We  commonly  think  of  safety  in  operation  as  of 
importance  only  in  the  passenger  service.    This  is 

^  "Railway  Corporations  as  Public  Servants,"  by  Henry 
S.  Haines,  page  154. 

127 


Tlir:    AMERICAN    TRANSPORTATION    QUESTION 

far  from  true.  The  railways  of  the  United  States 
pay  out  annually  about  $30,000,000  for  loss  of  and 
damage  to  property.  This  is  economic  waste,  a 
large  part  of  which  can  be  eliminated  only  by 
increasing  the  safety  of  operation. 

Of  course,  however,  those  most  interested  in  safe 
operation  are  not  the  shippers.  There  are  on  the 
pay  rolls  of  the  railways  of  the  United  States  al- 
most 1,700,000  men.  The  number  of  passengers 
transported  by  them  in  the  fiscal  year  1910  was 
971,683,199.  On  the  average  every  inhabitant 
takes  over  ten  railway  trips  a  year,  riding  a  total 
distance  of  about  350  miles.  Regarding  the  mat- 
ter from  a  purely  economic  standpoint,  enormous 
waste  was  occasioned  by  the  unsafety  of  operation 
which  resulted  in  3,602  employees  and  356  passen- 
gers being  killed  in  the  fiscal  year  1911,  and  in 
126,039  employees  and  13,433  passengers  being  in- 
jured. Still  further  economic  waste  was  caused 
by  6,438  other  persons  being  killed  and  10,687  oth- 
ers being  injured,  a  total  of  10,396  killed  and  150,- 
159  injured.^  We  want  economical  operation.  We 
want  low  rates.  But  they  are  of  little  importance 
compared  with  the  increased  efficiency  needed  to 
make  transportation  safe,  almost  regardless  of 
what  attaining  this  end  would  cost. 

Bearing  in  mind,  then,  that  railway  efficiency 

'  For  details  regarding   the  causes  of   railway  accidents 
see  page  166. 

128 


EFFICIENCY   AND    ECONOMY 

consists,  first,  of  economical  construction  and 
working,  and,  second,  of  the  rendering  of  good 
service,  let  us  consider  some  facts  indicating  how 
efficiently  our  railways  are  operated  and  what 
ought  to  be  done  to  increase  their  efficiency. 

Have  they  been  produced  in  their  present  con- 
dition economically?  The  cost  of  road  and  equip- 
ment up  to  June  30,  1909,  of  railways  having  221,- 
679  miles  of  line  was,  according  to  their  reports  to 
the  Interstate  Commerce  Commission,  $60,679  a 
mile.  The  average  capitalization  of  all  the  roads 
in  the  country  was  $59,259  a  mile.  It  is  quite 
generally  believed  that  they  are  overcapitalized. 
This  is  due  to  the  known  facts  that  in  their  earlier 
history  many  were  overcapitalized  and  that  the 
stock  of  some  has  been  freely  watered  since.  But, 
considering  them  as  a  single  system,  the  water 
probably  has  all  been  absorbed  by  increases  in  the 
value  of  their  real  estate  and  by  the  making  of 
permanent  improvements  from  earnings  without 
capitalizing  them.  Probably  to  have  constructed 
them  and  put  them  in  their  present  condition  by 
an  aggregate  expenditure  equal  only  to  their  out- 
standing capitalization,  if  every  expenditure  for 
capital  account,  and  only  expenditures  for  capital 
account  had  been  charged  to  capital  account,  would 
have  required  rigid  economy.  The  fact  that  the 
capitalization  of  our  railways  is  less  than  that  of 
the  railways  of  any  other  first-class  country  sup- 
ports this  view.     The    railways    of    the  United 

129 


TIIR    AMERICAN    TRANSPORTATION    QUESTION 

Kingdom  are  privately  owned.  Most  of  those  of 
France  are  privately  owned.  Practically  all  of 
those  of  Germany  and  Switzerland  are  owned  by 
the  governments.  The  capitalizations  (or  costs 
of  construction)  per  mile  of  the  railways  of  these 
countries  compare  with  that  of  our  railways  as 
follows:  ^  United  Kingdom,  $275,040;  France,  $139,- 
237;  Switzerland,  $110,740;  Germany,  $109,788; 
United  States,  $59,259. 

American  railways  have  not  paid  as  much  for 
land  for  right  of  way  as  have  those  of  Europe. 
But  they  have  paid  more  for  the  labor  used  in  con- 
struction. They  have  not  so  many  miles  of  sec- 
ond, third  and  fourth  tracks  and  yards  and  sidings 
as  some  European  railways;  but  their  capitaliza- 
tion per  mile  of  track,  as  well  as  per  mile  of  line, 
is  much  less  than  that  of  any  foreign  railways 
with  which  it  is  fair  to  compare  them.  For  ex- 
ample, the  capitalization  per  mile  of  track  of  the 
railways  of  the  United  Kingdom  is  $118,000;  of 
the  Prussian-Hessian  railways,  $76,217;  and  of  the 
railways  of  the  United  States,  $40,052. 

In  comparing  the  relative  capitalizations  (or 
costs  of  construction)  of  American  and  foreign 
railways  one  pertinent  fact  is  often  overlooked. 
This  is  that  the   European   railways  were  built 


'The  figures  are  for  the  following  years:  United  States, 
1909 ;  United  Kingdom  and  Germany,  1908 ;  France  and 
Switzerland,  1907. 

130 


EFFICIENCY   AND   ECONOMY 

through  settled  countries  that  could  afford  them  a 
large  traffic  from  the  beginning  and  were,  there- 
fore, originally  very  substantially  constructed, 
while  those  of  the  United  States  usually  have  been 
originally  built  through  thinly  populated  territory 
where  the  traffic  immediately  available  has  been 
small.  In  consequence,  they  have  been  at  first 
very  cheaply  constructed;  and  then,  when  in- 
creased business  has  justified,  have  been  partially 
or  wholly  reconstructed  in  order  to  reduce  grades 
and  curvature,  and  to  shorten  their  lines.  The 
original  right  of  way  has  in  many  cases  been  en- 
tirely abandoned  for  many  miles.  This  method 
of  developing  our  railroads  has  been  suited  to  the 
peculiar  conditions  of  this  country;  but  obviously 
it  has  tended  in  the  long  run  to  enlarge,  rather 
than  to  restrict  the  cost  of  construction  and  the 
resulting  capitalization.  The  railways  of  New 
South  Wales  have  been  built  by  the  government. 
They  were  constructed  under  conditions  similar  to 
those  of  pioneer  days  in  the  United  States.  They 
are  physically  much  inferior  to  our  railways.  Yet 
their  cost  of  construction  has  been  $64,000  per 
mile.* 

As   I  have  already  shown  in  the  chapters  on 
"Railway  Valuation  and  Profits,"  the  valuations 


1 1  have  given  the  capitalizations  per  mile  of  the  railways 
of  a  number  of  countries  in  one  of  the  chapters  on  "Railway 
Valuation  and  Profits." 

131 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  railways  that  have  licon  made  by  the  various 
state  commissions  and  courts  tend  to  show  that 
our  railways  could  not  now  be  reproduced  for  an 
amount  equal  to  their  capitalization.  The  con- 
clusion is  hard  to  escape  that,  however  it  may 
have  been  in  individual  cases,  comparative  econ- 
omy has  been  used  in  the  development  of  our  rail- 
ways as  a  whole. 

In  considering  w^hether  any  railway,  or  number 
of  railways,  is  operated  with  reasonable  economy 
we  should  not  fix  our  attention  on  any  part  or 
parts  of  them,  as,  for  example,  their  shops  or  their 
station  service.  We  should  consider  the  results  of 
their  entire  operations.  For  the  railway  is  a  com- 
plexus  of  numerous  industries  and  professions. 
None  of  its  parts  can  with  exact  justice  be  com- 
pared with  similar  concerns  not  connected  with 
the  transportation  business.  It  might  be  shown, 
for  example,  that  the  cost  per  unit  of  doing  many 
different  kinds  of  work  in  a  railway's  shop  ex- 
ceeds the  cost  per  unit  of  doing  the  same  kind  of 
work  in  factories  engaged  in  purely  commercial 
business.  But  this  would  not  prove  that  the  shops 
of  the  railways  are  inefficiently  managed.  When 
business  gets  dull  the  manager  of  a  factory  may 
close  down  entirely  until  enough  orders  accumu- 
late to  enable  him  to  resume  operations  on  a  scale 
on  which  he  can  turn  out  each  unit  of  product  eco- 
nomically. But  the  railway  must  operate  its  trains 
continuously,  whether  traffic  is  light  or  heavy ;  the 

132 


EFFICIENCY   AND   ECONOMY 

capacity  of  its  shops  should  be  the  maximum  that 
the  maximum  business  may  require;  and,  there- 
fore, they  will,  necessarily,  when  business  is  light, 
be  operated  with  relative  want  of  economy.  The 
agents  at  a  good  many  country  stations  have  only 
enough  work  to  keep  them  busy  part  of  the  day. 
Proper  service  to  the  public  requires  that  they  be 
kept  on  duty  throughout  the  day.  To  train  them 
to  do  their  work  in  one-third  less  time  would, 
therefore,  be  merely  to  give  them  more  hours  of 
idleness,  which  would  not  measurably  increase  the 
economy  of  operation ! 

But  while  the  economy  with  which  a  railway  is 
managed  can  be  judged  only  by  its  entire  results, 
it  is  exceedingly  difficult,  owing  to  the  great  dif- 
ferences between  the  conditions  under  which  rail- 
ways are  operated,  to  devise  any  standards  for 
measuring  the  comparative  economy  of  their  man- 
agement. The  business  of  railways  is  that  of  pro- 
ducing transportation  for  the  public.  The  units 
of  their  service  are  one  passenger  hauled  one  mile 
and  one  ton  hauled  one  mile — the  "passenger 
mile"  and  the  "ton  mile."  The  expenditures  that 
they  make  to  produce  passenger  miles  and  ton 
miles  are  of  two  classes.  These  are  (1)  the  fixed 
investment  in  their  plants,  represented  more  or 
less  accurately  by  their  capitalization;  and  (2) 
their  operating  expenses.  If  we  had  two  roads 
built  and  operated  under  precisely  similar  condi- 
tions, and  handling  the  same  kind  and  amounts  of 
10  133 


THE    AMERICAN    TRANSPORTATION    QUESTION 

traffic,  the  number  of  passenger  miles  and  ton 
miles  that  they  produced  for  each  dollar  of  invest- 
ment and  each  dollar  of  operating  expenses  would 
be  a  very  satisfactory  test  of  the  economy  with 
which  they  were  constructed  and  are  operated. 
But  the  conditions  required  for  such  exact  and 
satisfactory  comparisons  of  the  results  secured  by 
different  companies  can  seldom  be  found. 

Take,  for  example,  the  railways  between  whose 
capitalizations  I  have  made  comparison — those  of 
the  United  Kingdom,  Germany,  France,  Switzer- 
land, and  the  United  States.  As  I  have  said  else- 
where, the  railways  of  the  United  Kingdom  collect 
at,  and  deliver  from,  their  stations  much  of  the 
freight  they  transport.  The  railways,  both  of  the 
United  Kingdom  and  of  other  countries  of  Europe, 
themselves  handle  the  business  which  in  this  coun- 
try is  handled  by  express  companies.  The  aver- 
age distances  that  freight  and  passengers  are 
hauled  there  are  much  less  than  they  are  in  the 
United  States.*  The  density  of  passenger  traffic 
—that  is,  the  number  of  passengers  hauled  one 
mile  per  mile  of  line  per  year — is  much  greater  in 


'  The  average  hauls  of  freight  are  as  follows :  United 
Kingdom  (estimated),  25  miles;  Switzerland,  70  miles; 
France,  80  miles ;  Germany,  85  miles ;  United  States,  typical 
haul  of  the  average  railway,  141.87  miles,  typical  haul  of  all 
railways  regarded  as  a  system,  251.1  miles.  The  average 
journeys  of  passengers  are  as  follows:  United  Kingdom  (es- 
timated), 7.8 miles;  Switzerland,  12.8  miles;  Germany,  14.31 

134 


EFFICIENCY   AND    ECONOMY 

Europe  than  in  the  United  States.  On  the  other 
hand,  the  density  of  freight  traffic — that  is,  the 
number  of  tons  hauled  one  mile  per  mile  of  line 
per  year — is  greater  in  the  United  States  than  in 
most  of  the  countries  of  Europe  and  very  much 
greater  than  in  many  of  them.  Now,  while  either 
a  dense  passenger  traffic  or  a  dense  freight  traffic 
may  be  handled  more  economically  per  unit  than  a 
light  one,  freight  traffic  is  much  more  susceptible 
to  the  introduction  of  economies  of  operation  than 
is  passenger  traffic.  All  these  conditions  tend  to 
make  it  practicable  for  the  railways  of  the  United 
States  to  render  more  units  of  public  service  per 
dollar  of  capital  and  of  operating  expenses  than 
can  those  of  Europe.  On  the  other  hand,  the 
prices  of  materials  and  equipment  are  as  high  here 
as,  or  higher  than,  in  Europe,  and  the  wages  of 
labor  are  fully  twice  as  great.  On  the  whole,  the 
American  railways  have  enjoyed  more  favorable 
conditions  for  economical  operation,  and  the  sta- 
tistics bearing  on  the  subject  disclose  that  they 
have  taken  advantage  of  them  to  a  very  marked 
degree. 


miles  ;  France,  20.75  miles  ;  United  States,  32.85  miles.  The 
average  journey  of  first-class  passengers  in  Europe,  who  are 
charged  rates  as  high  on  the  average  as  those  in  the  United 
States,  is  longer  than  the  average  journey  in  the  United 
States.  On  the  Prussian-Hessian  railways,  the  average 
journey  for  first-class  passengers  in  1908  was  79.17  miles, 
and  in  France  it  was  40.5  miles. 

135 


THE    AMERICAN    TRANSPORTATION    QUESTION 


The  followinjj:  table  shows  in  detail  the  relation 
between  capitalization,  operating  expenses  and 
public  service  rendered : 


United 
States. 

1909 

953,986 
127,299 

1,081,285 

United 
King- 
dom.' 

1908 

529,622 
588,044 

1.109,666 

Germany. 
1908 

827.400 
640,045 

1,367,445 

1907      1907 

496,939 
380,355 

877,294 

442.012 

Passenprer  miles  per  mile  of  road 

Total  units  of  public  service  per  t 
mile  of  road j 

45i.65-l 
898,666 

Capitalization  (or  cost  of  construe-  ) 

$59,259 

16.09 
2.14 

18.23 

$275,040 

1.92 
2.11 

4.03 

$109,788 

7.54 
4.92 

12.46 

$139,237  $110,740 

Ton  miles  per  dollar  of  capital 

Passenger  miles  per  dollar  of  capital 

Total  units  of  public   service  per  1 

dollar  of  capital ) 

3.57 
2.73 

6.30 

4.06 
4.18 

8.24 

Operating  expenses  per  mile  of  road 
Ton  miles  per  dollar  of  operating  1 

expenses / 

Passenger  miles  per  dollar  of  oper-  1 

$6,851 
139 

19 

158 

$16,036 
33 

36 

69 

$13,394 
62 

40 

102 

$7,392 
67 

51 

118 

$9,603 
46 

48 

Total  units  of  public    service  per  1 
dollar  of  operating  expenses. . .  J 

94 

The  above  table  shows  that  in  proportion  to 
capitalization  the  railways  of  the  United  States 
handle  1.47  per  cent,  more  passenger  traffic  than 
those  of  the  United  Kingdom,  56.50  per  cent. 
less  than  those  of  Geraiany,  21.61  per  cent,  less 

'  Attention  should  here  be  called  to  the  fact  that  railway 
statistics  are  very  incompletely  compiled  in  the  United 
King-dom,  and  that  such  figxires  as  the  average  passenger 
haul,  the  average  freight  haul,  the  average  revenue  per  ton 
and  per  passenger  per  mile  can  be  estimated  only  after 
rather  elaborate  investigation,  and  that  even  then  any  state- 
ments of  these  averages  cannot  be  made  more  than  ai)proxi- 
mately  correct.  The  figures  here  given  are  those  that  are 
accepted  by  the  best  authorities  as  most  nearly  correct. 

136 


EFFICIENCY   AND    ECONOMY 

than  those  of  France,  and  41.81  percent.  less  than 
those  of  Switzerland.  On  the  other  hand,  in  pro- 
portion to  capitalization,  they  handle  738.02  per 
cent,  more  freight  than  those  of  the  United  King- 
dom, 113.39  per  cent,  more  than  those  of  Germany, 
350.70  per  cent,  more  than  those  of  France,  and 
296.30  per  cent,  more  than  those  of  Switzerland. 
In  proportion  to  their  operating  expenses  they 
handle  47.22  per  cent,  less  passenger  traffic  than 
do  the  railways  of  the  United  Kingdom,  52.5  per 
cent,  less  than  those  of  Germany,  62.74  per  cent, 
less  than  those  of  France,  and  60.41  per  cent,  less 
than  those  of  Switzerland.  On  the  other  hand,  in 
proportion  to  their  operating  expenses,  they  han- 
dle 321.21  per  cent,  more  freight  than  those  of  the 
United  Kingdom,  124.19  per  cent,  more  than  those 
of  Germany,  107.46  per  cent,  more  than  those  of 
France,  and  202.17  per  cent,  more  than  those  of 
Switzerland.*  Now,  while  unquestionably  the  dif- 
ference between  the  results  got  from  each  dollar 
of  investment  and  each  dollar  spent  for  operation 
here  and  abroad  can  be  largely  accounted  for  by 
differences  in  conditions,  it  cannot  by  any  means 
be  wholly  so  accounted  for.  It  is  very  largely  due 
to  the  superior  courage,  enterprise  and  skill  with 
which  the  railway  managers  of  the  United  States 
have  so  developed  the  facilities  of  their  lines  as  to 

1  As  I  have  shown  elsewhere,  the  average  passenger  rate 
in  European  countries  is  somewhat  lower,  and  the  average 
freight  rate  very  much  higher  than  in  the  United  States. 

137 


TIIH    AMERICAN    TRANSPORTATION    QUESTION 

make  economical  operation  practicable.'  The  ca- 
pacity of  freight  cars  in  Europe  is  usually  from  10 
to  15  tons.  The  average  probably  does  not  exceed 
12^  tons;  and  there  has  been  but  a  small  increase 
in  many  years.  In  the  United  States  the  average 
capacity  in  1909  was  35  tons,  an  increase  of  25  per 
cent,  over  that  of  1902.  The  differences  between 
the  tractive  powers  of  locomotives,  and  between 
the  sizes  of  the  car  loads  and  train  loads  in  which 
traffic  is  handled,  in  Europe  and  the  United  States, 
correspond  to  the  difference  in  the  capacities  of 


^  In  an  article  entitled  "The  Position  of  British  Rail- 
ways," in  the  No7-th  American  Review  for  November,  1909, 
W.  M.  Acworth,  the  leading  English  authority  on  railway 
economics,  said:  "If  an  outsider  might  criticise,  I  should 
say  that  I  am  startled  at  the  ingratitude  which  the  American 
public  has  displayed  in  return  for  the  marvelous  skill  and 
energy  with  which  American  railway  men  revolutionized  the 
operation  of  American  railways  in  the  years  when  traffic  be- 
gan to  recover  after  the  panic  of  1893.  New  capital  being 
practically  unobtainable,  they  made  one  dollar  do  the  work 
of  two,  and  turned  out  with  the  old  plant  an  output  that 
would  have  been  inconceivable  to  the  same  men  ten  years 
before.  Regarding  the  matter  from  an  operating  side, 
American  railways  have  had  enormous  difficulties  to  face, 
and  on  the  whole  have  surmounted  them.  .  .  .  Undoubtedly, 
British  railways  have  had  great  difficulties  to  face.  With  a 
revenue  increasing  but  slowly,  they  have  had  to  meet  the 
demands,  constantly  more  exacting,  of  the  public  and  the 
legislature.  But  I  am  bound  to  say  that  the  conditions  they 
have  had  to  face  have  not  been  as  difficult  as  those  that 
have  been  faced  successfully  in  America.  The  British  le- 
gislature has  interfered  to  require  shorter  hours  of  labor, 
larger  expenditure  on  safety  appliances,  and  in  some  cases 
even  lower  rates.     But  the  sum  total  of  it  all  has  not  been 

138 


EFFICIENCY   AND    ECONOMY 

freight  cars.  The  average  tractive  power  of  loco- 
motives in  the  United  States  in  1902  was  20,485 
pounds.  In  1909  it  was  26,601  pounds,  an  increase 
of  30  per  cent. ' 

The  number  of  passengers  hauled  one  mile  per 
passenger  locomotive  increased  between  1889  and 
1900  from  1,474,765  to  2,185,877,  or  49  per  cent. 
The  number  of  passengers  hauled  one  mile  per 
passenger  car  increased  from  431,059  to  638,586, 
or  48  per  cent.  The  tons  of  freight  hauled  one 
mile  per  freight  locomotive  increased  from  5,966,- 

very  serious,  and  I  think  an  American  railroad  official  would 
breathe  a  sigh  of  content  if  he  could  exchange  the  whips  of 
Louisiana  or  the  scorpions  of  Texas  for  the  gentle  parental 
suasion  of  the  British  Parliament.  Wages  on  British  rail- 
ways have  gone  up  and  hours  of  labor  have  gone  down. 
The  same  thing  has  happened  in  the  States.  But  in  the 
States  organization  has  enabled  one  man  to  do  the  work  of 
two,  with  the  result  that,  per  ton  handled,  wages  are  down, 
not  up.  That  result  has,  unfortunately,  not  been  attained 
in  Great  Britain. " 

'  There  are  no  statistics  regarding  car  capacity  and  loco- 
motive tractive  power  for  the  railways  of  the  United  States 
earlier  than  for  the  year  1902.  Mr.  J.  Kruttschnitt,  Direc- 
tor of  Maintenance  and  Operation  of  the  Union  Pacific  Rail- 
road and  the  Southern  Pacific  Company,  in  a  lecture  to  the 
students  of  Harvard  University,  on  April  26,  1911,  gave 
much  earlier  figures  for  the  Southern  Pacific  Company. 
They  showed  that  the  average  capacity  of  freight  cars  on  its 
lines  increased  from  18.5  in  1889  to  37.6  in  1909,  or  102  per 
cent.  ;  that  the  average  driver  weight  of  locomotives  in- 
creased during  the  same  period  from  27  to  58.8  tons,  or 
117.77  per  cent.,  and  that  the  average  tons  of  dead  weight 
per  ton  of  car  carrying  capacity  decreased  from  .60  to  1.43, 
or  38  per  cent. 

139 


Till']    AMERICAN    TRANSPORTATION    QUESTION 

193  to  G, 447, 708,  or  8  per  cent.,  and  the  tons  hauled 
one  mile  per  freight  car  increased  from  95,458  to 
105,518,  or  11  per  cent.  The  ton  miles  and  pas- 
senger miles  moved  per  employee,  largely  in  con- 
sequence of  improvements  such  as  these,  increased 
from  113,915  in  1889  to  148,837  in  1899,  and  to 
164,946  in  1909,  an  increase  for  the  latter  year 
over  1889  of  45  per  cent. 

Meantime,  innumerable  other  improvements 
were  made  tending  to  increase  the  economy  of  op- 
eration, such  as  reductions  of  grades,  eliminations 
of  curvature,  the  laying  of  heavier  rail,  strength- 
ening of  bridges  and  other  structures,  building  of 
more  main  tracks,  side  tracks,  yards  and  termi- 
nals, adopting  of  more  refined  methods  of  opera- 
tion, such  as  carefully  regulating  locomotives,  run- 
ning them  at  the  most  economical  speeds  for  the 
train  loads  they  haul,  etc.  The  average  tons  per 
train  increased  in  the  ten  years  from  1899  to  1909 
from  244  to  363,  or  49  per  cent/  The  average 
freight  train  load  in  Europe  is  certainly  not  more 
than  one-half  of  what  it  is  in  this  country.  From 
a  study  of  the  meager  data  available,  I  believe 
that  in  England  it  is  not  more  than  one-third.  Of 
course,  the  larger   car  loads  and  train  loads  are, 

'  Meantime,  the  average  number  of  passengers  per  train 
increased  only  from  41  to  54,  or  32  per  cent.,  although  the 
percentage  of  increase  in  the  density  of  passenger  traffic 
was  greater  than  in  the  density  of  freight  traffic.  This 
shows  how  much  more  susceptible  to  the  introduction  of  econ- 
omies of  handling  freight  traffic  is  than  passenger  traffic. 

140 


EFFICIENCY   AND   ECONOMY 

the  more  economically,  other  things  being  equal, 
traffic  can  be  handled/ 
W.    M.   Acworth^  is  the  leading  authority  on 


'  Perhaps  the  tendency  to  take  advantage  of  improve- 
ments in  roadway  and  rolling  stock  to  increase  the  train 
load  can  be  best  illustrated  by  some  striking  examples,  all 
of  them  afforded  by  the  year  1909.  The  New  York  Central 
hauled  with  a  Consolidation  locomotive  a  train  consisting  of 
105  cars  of  coal,  the  gross  weight  of  the  train — including 
both  freight  and  dead  weight — being  7,381  tons.  The  Lake 
Shore  a  little  later,  with  a  Consolidation  engine,  hauled  a 
train  load  of  ore  containing  100  steel  cars  and  having  a  gross 
weight  of  7,433  tons,  from  Ashtabula,  Ohio,  to  Youngstown, 
a  distance  of  65  miles,  in  5  hours  and  15  minutes.  On  the 
Pennsylvania  Railroad  a  Consolidation  engine  pulled  a  train 
composed  of  105  steel  cars,  which  contained  5,544  tons  of 
coal,  from  Altoona,  Pennsylvania,  to  Enola,  a  distance  of 
127  miles,  at  an  average  speed  of  17.6  miles  per  hour.  The 
train  was  3,600  feet  long,  or  a  little  more  than  two-thirds 
of  a  mile.  The  steepest  grade  met  was  12  feet  to  the  mile. 
On  the  Virginian  Railway  a  Mikado  engine  hauled  100  steel 
cars,  containing  5,500  tons  of  coal,  125  miles  in  8  hours.  The 
engine  was  73  feet  8  inches  long.  The  cars  were  43  feet  over 
couplers  and  the  caboose,  -vhich  weighed  18  tons,  was  30  feet 
long.  The  weight  of  the  train  behind  the  engine  was  7,562 
tons.  The  grade  on  which  it  was  hauled  was  easy,  but  there 
was  some  opposing  grade.  Later  a  Mallet  engine  hauled  on 
the  Virginian  a  train  composed  of  120  steel  cars,  which, 
with  the  engine  and  caboose,  was  6,286  feet  long,  or  6  feet 
more  than  a  mile.  The  weight  of  the  coal  in  the  train  was 
6,000  tons,  or  12,000,000  pounds.  In  such  trains  as  these  the 
cost  of  hauling  one  ton  of  freight  one  mile  seems  reduced 
close  to  the  practicable  minimum.  Perhaps,  however,  a  few 
years  will  see  developments  by  which  the  cost  can  be  made 
still  less. 

2  Author  of  "Elements  of  Railway  Economics,"  "The 
Railways  and  the  Traders,"  etc. 

141 


Till-:    AMERICAN    TRANSPORTATION    QUESTION 

transportation  in  England.  He  has  studied  rail- 
ways and  their  operations  extensively  and  is  prob- 
ably as  competent  to  judge  of  their  relative  effi- 
ciency as  any  other  man.  In  a  recent  newspaper 
interview,'  given  as  he  was  starting  to  England 
after  two  months  in  this  country,  Mr.  Acworth 
said: 

It  has  always  been  my  opinion  that  in  actual  econ- 
omy of  operation  the  railways  of  the  United  States  are 
the  first  in  the  world.  In  the  number  of  tons  per  car, 
cars  per  train;  in  the  fullest  utilization  of  locomotives; 
in  the  obtaining  of  the  greatest  measure  of  result  for 
each  unit  of  expenditure,  they  are  not  equaled  by  the 
railways  of  any  other  nation.  When  the  Greek  com- 
manders after  the  battle  of  Salamis  voted  who  should 
receive  the  prize  for  valor  each  put  his  name  first,  but 
all  put  the  name  of  Themistocles  second.  And  Themis- 
tocles  received  the  prize.  So,  too,  though  German, 
French  and  English  railway  men  would,  I  dare  say,  all 
put  their  own  railways  first  in  efficiency,  they  would 
all,  I  am  sure,  put  yours  second,  and  on  the  voting  of 
the  experts  your  railways  would  come  out  first. 

Mr.  J.  Kruttschnitt  has  pointed  out^  that  be- 
tween 1894  and  1909,  a  period  of  fifteen  years,  the 
average  wages  of  labor  and  prices  of  commodities 


'  Neiv  York  Evening  Sun,  February  1,  1911. 
2  Lecture  to  the  students  of  Harvard  University,  April 
26,  1911. 

142 


EFFICIENCY   AND    ECONOMY 

in  the  United  States  increased  32  per  cent.,  as 
shown  by  bulletins  of  the  United  States  Bureau  of 
Labor.  Meantime  the  average  freight  and  passen- 
ger rates  in  the  United  States  slightly  declined, 
the  average  rate  per  ton  per  mile  in  1894  being 
8.6  mills  and  in  1909,  7.63  mills;  the  average  rate 
per  passenger  per  mile  in  1894  being  1.986  cents, 
and  in  1909,  1.982  cents.  Mr.  Kruttschnitt  calcu- 
lated that  if  railway  rates  had  increased  as  much 
in  proportion  during  this  period  as  the  prices  of 
commodities  and  the  wages  of  labor,  the  country's 
bill  for  transportation  during  the  period  would  have 
averaged  $1,300,000  per  day  more  than  it  actually 
did;  that  for  the  year  1909  it  would  have  averaged 
$2,760,000  per  day  more  than  it  did;  and  that  for 
the  entire  period  it  would  have  been  $7,844,343,- 
000  more  than  it  actually  was.  This  is  the  reply 
of  the  railway  managers  to  the  statement  which 
has  been  made  that  by  more  efficient  management 
they  could  reduce  the  cost  of  transportation  a  mil- 
lion dollars  a  day.  They  say  that  these  figures 
show  that  by  efficient  management  in  the  past 
they  actually  have  saved  the  country  more  than  a 
million  dollars  a  day;  and  that  this  shows  they  can 
do  so  in  future  if  given  a  chance;  but  that  they 
must  be  given  a  substantial  amount  of  time  and 
the  cooperation  of  other  interests  in  order  to  ac- 
complish these  results. 

To  say  that  our  railways  are  operated  with  com- 
parative economy  is  not  equivalent  to  saying  they 

143 


Tin-:    AMERICAN    TRANSPORTATION    QUESTION 

arc  operated  as  economically  as  they  could  be,  or, 
perhaps,  ought  to  be.  There  is  constant  complaint 
from  railway  officers  that  the  efficiency  of  labor 
has  not  increased  with  its  wages,  but  has  declined. 
The  Interstate  Commerce  Commission,  in  its  opin- 
ion in  the  "rate  advance"  cases  in  the  spring  of 
1911,  intimated  that  the  fact  that  the  same  men 
are  dominant  in  the  affairs  of  some  concerns  mak- 
ing and  selling  railway  supplies  and  equipment 
and  some  railways,  has  caused  railways  to  pay 
higher  prices  for  some  kinds  of  supplies  and  equip- 
ment than  they  would  have  paid  in  a  market 
where  all  buyers  and  sellers  dealt  at  arm's  length. 
Ground  is  not  entirely  wanting  for  this  charge. 
It  can  be  shown  that  the  amount  of  work  done  by 
engines  and  cars  has  not  increased  as  much  as  their 
capacities.*  The  efficiency  of  labor,  the  number  of 


•While  the  average  tractive  power  of  locomotives  in- 
creased 30  per  cent,  between  1902  and  1909,  the  average 
number  of  passengers  per  train  increased  only  20  per  cent. , 
and  the  average  number  of  tons  per  train  only  22  per  cent. 
The  consequence  was  that  the  number  of  passengers  hauled 
one  mile  per  pound  of  tractive  power  decreased  25.6  per 
cent.,  and  that  the  number  of  tons  hauled  one  mile  per 
pound  of  tractive  power  decreased  30  per  cent.  The  aver- 
age capacity  of  freight  cars  increased  25  per  cent,  between 
1902  and  1909  and  the  average  tons  moved  per  car  mile,  in- 
cluding both  empty  and  loaded  cars,  increased  less  than 
eight-tenths  of  1  per  cent.,  and  the  average  tons  moved  per 
loaded  car  mile  increased  less  than  3  per  cent.  The  result 
was  that  the  average  number  of  tons  moved  one  mile  per  ton 
of  car  capacity  decreased  20  per  cent. 

144 


EFFICIENCY   AND   ECONOMY 

miles  made  by  each  car  and  locomotive  daily/  the 
tons  hauled  per  car  and  locomotive,  ought  to  be 
increased  wherever  this  can  be  done  without  im- 
pairing the  service.     Probably  the  railway  mana- 

'  The  fact  that  on  the  average  a  freight  car  moves  only 
24  miles  a  day  frequently  has  been  cited  as  evidence  that 
railways  are  inefficiently  operated.  But  to  say  that  because 
the  railways  on  the  average  move  a  freight  car  only  24  miles 
a  day  they  are  inefficiently  operated  is  like  saying  that  be- 
cause a  man  walks  only  4  miles  a  day — when,  in  fact,  he 
puts  in  only  an  hour  a  day  at  walking — he  is  a  poor  walker. 
The  average  speed  of  freight  cars  ivlien  in  motion  is  not  24 
miles  a  day,  but  about  10  miles  an  hour.  The  only  way  to 
form  a  correct  opinion  as  to  how  efficiently  freight  cars  are 
handled  on  the  average  is  to  consider  in  detail  the  average 
car's  movement  from  the  time  it  is  started  to  be  loaded  un- 
til it  has  completed  its  trip  and  been  unloaded.  The  average 
time  required  for  the  loaded  and  empty  car  movement  in- 
volved in  the  average  haul  of  freight  in  the  United  States 
is  about  12  days,  and  the  average  distance  the  car  moves 
about  330  miles.  Two  days'  free  time  is  usually  allowed  for 
loading  and  also  for  unloading  (not  including  Sundays  and 
holidays,  for  which  additional  free  time  is  allowed)  and  the 
statistics  of  the  demurrage  bureaus  show  that  the  delays  of 
the  car  at  terminals  by  the  shipper  and  consignee  for  load- 
ing and  unloading  average  about  4|  days  for  each  move- 
ment. This  leaves  an  average  of  7J  days  during  which  the 
ear  actually  is  in  the  possession  of  the  railway  and  gives  an 
average  movement  of  about  44  miles  per  day.  This  time 
during  which  the  car  is  in  the  possession  of  the  railway  in- 
cludes all  legitimate  detention  of  it,  such  as  for  switching 
in  yards  en  route,  for  rigid  inspection  and  frequent  shop- 
pings, and  for  occasional  transfer  of  lading  by  reason  of  en- 
forcement of  the  stringent  safety  appliance  regulations.  It 
includes  the  period  during  which  cars  are  held  for  recon- 
signment  to  accommodate  shippers,  and  also  the  periods  dur- 
ing which  cars  are  in  shops ;  and,  on  the  average,  about  5 

145 


THE    AMERICAN    TRANSPORTATION    QUESTION 

gers   cannot  effect  these  economies  without  the 
cooperation  of    employees,   shippers    and    public 
authorities. 
They  must  have  the  cooperation  of  shippers,  be- 


per  cent,  of  the  total  number  of  cars  are  in  the  shops  at  any 
given  time.  It  also  includes  the  movement  not  merely  of 
loaded  cars,  but  also  of  empty  cars ;  and,  of  course,  the  av- 
erage movement  of  empty  cars  is  much  less  than  of  loaded 
cars,  because  the  empty  car  stands  on  the  sidings  for  much 
longer  periods,  which  periods  of  idleness  are  included  in  the 
average  vioveynent.  The  effect  of  a  heavy  reduction  in  traffic 
and  consequent  proportionate  increase  in  the  number  of  idle 
cars  on  the  average  movement  of  all  freight  cars  was  strik- 
ingly shown  just  after  the  panic  of  1907.  In  October,  1907, 
when  traffic  was  very  heavy,  the  average  movement  of  all 
the  cars  in  the  United  States  was  24.8  miles  per  day.  In 
April,  1908,  there  were  substantially  700,000  idle  cars,  in- 
cluding those  in  shops  ;  and  in  that  month  the  average  move- 
ment per  day  was  but  19.6  miles,  or  20  per  cent,  less  than 
in  October,  1907.  Now,  there  are  four  months  in  every  year 
when  practically  all  the  freight  cars  in  the  country  are  busy, 
and  eight  months  when  a  large  part  of  them  are  not  in  ser- 
vice, and,  of  course,  the  great  number  of  cars  idle  during 
these  eight  months  pulls  down  the  figure  showing  the 
average  Tnovement. 

When  all  these  conditions  are  taken  into  consideration  it 
does  not  seem  at  all  surprising  that  the  average  movement 
of  a  freight  car  is  but  24  miles  a  day.  It  also  appears  per- 
fectly evident  that  those  who  are  best  situated  to  increase 
this  average  movement  are  the  shippers,  who  have  actual 
possession  of  the  car  for  loading  and  unloading  more  than 
one-third  of  the  time,  who  have  practical  possession  of  it  for 
a  considerable  time  for  reconsignment,  and  whose  failure  to 
provide  a  more  uniform  traffic  throughout  the  year  makes  it 
necessary  for  eight  months  of  the  year  to  have  thousands  of 
cars  standing  idle  on  the  side  tracks. 

146 


EFFICIENCY   AND   ECONOMY 

cause  without  it  they  cannot  secure  such  prompt 
loading  and  unloading  of  cars,  and  such  large  car 
loads  and  train  loads,  as  are  necessary  to  the  most 
economical  operation.  They  must  have  the  coop- 
eration of  the  public  authorities  because,  as  I  have 
sought  to  show  in  the  chapters  on  "Railway  Valu- 
ation and  Profits,"  the  adoption  of  a  policy  of  re- 
stricting all  railways  to  the  same  return  would 
deaden  enterprise  and  prevent  the  introduction  of 
improvements  in  methods  and  plants.  Another 
reason  why  they  need  the  cooperation  of  the  pub- 
lic and  public  authorities  is  to  prevent  legislation 
which  increases  the  cost  of  operation  without  con- 
ferring any  real  benefit  on  any  one.  Of  this  class, 
for  example,  are  the  laws  that  have  been  passed  in 
several  states  prescribing  the  number  of  men  that 
must  be  employed  in  train  crews.  Ten  or  fifteen 
years  ago  two  brakemen  were  sufficient  for  a 
freight  train,  although  then  the  cars  had  to  be 
coupled  and  the  brakes  applied  by  hand.  There 
has  been  since  then  a  very  substantial  increase  in 
the  tonnage  hauled  per  train.  This  is  partly  be- 
cause the  number  of  cars  per  train  has  been  in- 
creased, but  it  is  also  largely  because  cars  of 
greater  capacity  are  now  used.  In  spite  of  the 
increased  size  of  train  loads  there  is  not — owing  to 
the  fact  that  all  engines  have  now  been  equipped 
with  train  brakes  and  all  cars  with  automatic 
couplers — any  more  work  for  brakemen  to  do  now 
than  there  was    then.    Nevertheless,   the   state 

147 


THE    AMERICAN    TRANSPORTATION    QUESTION 

laws  referred  to  commonly  require  three  brakemen 
on  a  train.  The  effect  of  such  legislation  is  to  in- 
crease needlessly  the  number  of  men  the  railways 
must  employ,  and  thereby  raise  the  cost  of  trans- 
portation.' 

Most  important  of  all,  the  railways  must  have 
the  cooperation  of  their  employees;  without  it  all 
efforts  from  whatever  source  to  increase  the  econ- 
omy of  operation  will  be  nullified.  The  wages  an- 
nually paid  by  the  railways  of  the  United  States 
now  amount  to  over  $1,000,000,000.  This  is  60  per 
cent,  of  their  total  operating  expenses.  Unfortu- 
nately, the  relations  between  the  roads  and  many 
of  their  employees  are  not  such — nor  is  there  now 
any  promise  of  their  becoming  such — as  to  pro- 
mote the  greatest  reasonable  economy  in  opera- 


'  A  full  crew  bill  was  pending  recently  before  the  legis- 
lature of  one  of  the  Northwestern  states.  The  management 
of  one  of  the  railways  got  one  of  its  most  experienced  con- 
ductors to  appear  before  the  committee  to  which  the  meas- 
ure had  been  referred,  to  oppose  it.  We  will  call  his  name 
Murphy.  The  following  collo(iuy  took  place  between  the 
chairman  of  the  committee  and  Mi-.  Murphy: 

Chairman — Mr.  Murphy,  don't  you  think  the  passage  of 
this  bill  would  be  beneficial? 

Murphy— Yes,  sir,  I  do. 

Chairman— Will  you  please  state  to  the  committee  what 
advantage  would  be  derived  from  it? 

Murphy  Well,  if  you  passed  this  bill  there  would  be 
enough  of  us  to  get  up  a  good  game  of  pitch  back  in  the 
caboose. 

This  is,  perhaps,  as  sincere  and  convincing  an  argument 
for  such  legislation  as  ever  has  been  made. 

148 


EFFICIENCY   AND   ECONOMY 

tion.  Scientific  management  requires  the  training 
and  compensating  of  each  employee  so  as  to  get 
the  maximum  reasonable  results,  both  in  quantity 
and  quality,  from  his  labor.  Where  wage  scales 
are  wisely  and  fairly  adjusted  this  means  at  once 
relatively  high  pay  for  the  employee  and  a  low 
unit  cost  of  production  for  the  employer.  The 
leaders  of  the  labor  unions  very  generally  oppose 
any  scheme  of  wages  under  which  one  man  doing 
a  given  kind  of  work  is  paid  more  than  another 
man  doing  the  same  kind.  One  objection  made 
by  them  to  piece  work  and  bonus  wage  systems  is 
that  after  employers,  by  the  use  of  such  systems, 
have  increased  the  average  output  per  employee, 
they  often  have  reduced  the  piece  rate  or  the 
bonus,  the  consequence  being  that  the  employee 
has  to  do  more  work  than  before  the  introduction 
of  the  piece  work  or  bonus  system  to  earn  the 
same  pay.  There  is  much  ground  for  this  com- 
plaint. Employers  often  have  been  guilty  of  this 
injustice.  Another  reason  why  labor  unions  often 
oppose  schemes  of  wages  designed  to  increase  the 
work  done  by  each  man  is  their  belief  that  this 
would  tend  to  reduce  the  number  of  men  employed. 
Of  course,  every  economist  knows  that  this  is  a 
fallacy.  The  amount  of  work  to  be  done  in  the 
world  is  not  a  fixed  quantity.  Work  is  done  to 
produce  things.  The  nominal  wages  of  labor  are 
money,  but  its  real  wages  are  not  money,  but  what 
money  buys.  The  things  money  buys  are  the 
11  149 


TIIK    AMERICAN    TRANSPORTATION    QUESTION 

products  of  labor.  The  less  labor,  as  a  whole  pro- 
duces, therefore,  the  less,  in  the  long  run,  it  tends 
to  make  its  own  wages — not  its  nominal,  or  money, 
wages,  which  by  limitation  of  production  may  be 
actually  increased,  but  its  real  wages — the  prod- 
ucts in  which  it  is  paid— which  by  the  very  same 
process  are  reduced.  Therefore,  by  limiting  the 
amount  it  produces  labor  is  apt  simply  to  bite  off 
its  own  nose  to  spite  the  capitalist  employer's 
face. 

But  while  the  antagonism  of  labor  unions  to  any 
system  of  wages  that  tends  to  increase  the  amount 
of  work  done  by  each  employee  is  unreasonable,  it 
is  very  real ;  and  nowhere  is  it  more  real,  or  more 
vigorously  manifested,  than  on  the  railways.  Rail- 
way train  employees  are  paid  on  a  sort  of  piece- 
work basis.  Under  this  scheme  either  ten  hours' 
labor,  or  work  on  a  train  during  the  time  that  it 
moves  100  miles,  is  counted  a  day.  If  the  employee 
works  more  than  ten  hours,  or  his  train  runs  more 
than  100  miles,  he  is  entitled  to  "overtime."  He 
may  run  only  90  miles  in  10  hours;  if  so,  he  has 
worked  a  day.  He  may  run  110  miles  in  3  hours; 
if  so,  he  has  worked  10  per  cent,  more  than  a  day 
and  is  entitled  to  credit  for  a  proportionate  amount 
of  "overtime. "  This  wage  system  originally  was 
adopted  for  the  purpose,  and  no  doubt  had  the 
effect,  of  expediting  the  movement  of  trains.  But 
in  consequence  of  the  development  of  the  railway 
business  it  has  become  an  irrational  and  unduly 

IFO 


EFFICIENCY   AND    ECONOMY 

expensive  method  of  compensation.  The  wages  of 
the  employee  should  depend  only  to  a  limited  ex- 
tent on  the  speed  of  the  machine  he  operates. 
They  should  depend  mainly  on  results  due  to  his 
own  efforts.  Now,  under  this  system  of  paying 
railway  trainmen,  doubling  the  speed  of  a  locomo- 
tive that  pulled  a  train  might  double  the  wages 
paid  to  every  man  employed  on  it.  The  speed  of 
engines  and  trains  has  been  in  very  many  cases 
greatly  increased  since  this  scheme  of  wages  was 
adopted;  and  in  consequence  many  employees  are 
now  earning  very  high  wages  for  doing  a  compar- 
atively small  amount  of  work.  For  example,  a 
locomotive  engineer  may  make  a  three  or  four 
hour  run  out  of  Chicago,  and  then  in  a  short  time 
make  the  same  run  back,  covering  200  miles  in  six 
or  eight  hours.  He  thereby  earns  two  days'  pay 
in  this  short  time,  not  because  he  is  a  specially 
skilful  workman,  but  because  he  has  a  fast  train. 
Another  just  as  good  engineer  may  run  another 
train  over  the  same  division  the  same  day,  and 
because  he  pulls  a  train  that  is  scheduled  slower 
may  earn  but  half  as  much.  A  piece-work  system 
that  is  based  so  largely  upon  what  machines  do, 
and  to  so  very  slight  a  degree  upon  what  the  men 
do  who  run  them,  is  extravagant,  and,  as  a  means 
to  stimulating  individual  effort,  almost  worthless. 
But  while  the  railway  brotherhoods  defend  this 
system  and  would  resist  the  substitution  of  some 
more   equitable  and  economical  one,    they   fight 

151 


THK    AMERICAN    TRANSPORTATION    QUESTION 

every  eH'ort  to  introduce  any  method  of  fixing 
wages  that  is  designed  to  reward  each  employee 
according  to  the  quality  and  the  quantity  of  the 
work  that  he  does.  The  managers  of  the  railways 
have  introduced  and  retained  piece  work  and 
bonus  wage  systems  in  various  places.  But  before 
they  could  put  the  wages  of  all,  or  even  of  any 
considerable  pai't,  of  their  more  than  a  million  and 
a  half  workmen  on  an  individual  effort  basis  they 
probably  would  have  to  have  and  win  a  great 
strike.  The  public,  before  it  criticises  the  rail- 
ways for  being  less  economically  managed  than 
they  might  be,  should  know  these  facts  and  look 
them  squarely  in  the  face. 


CHAPTER  VIII 

RAILWAY    EFFICIENCY    FROM     THE     STANDPOINT 
OF    PUBLIC    SERVICE 

We  have  now  considered  at  some  length  the 
economy  with  which  the  railways  of  the  United 
States  are  operated.  In  this  respect  they  probably 
will  bear  comparison  with  any  others.  But,  as 
has  been  pointed  out,  economy  is  not  the  sole 
measure  of  efficiency.  Unfortunately,  quality  of 
service,  unlike  economy,  is  not  susceptible  of  ad- 
measurement and  comparison  in  terms  of  compar- 
ative statistics.  Furthermore,  good  service  in  one 
country  may  not  be  good  service  in  another.  It  is 
the  duty  of  railw^ays  to  supply  the  kind  of  service 
the  public  demands  and  needs;  and  it  may  demand 
and  need  a  different  kind  in  one  country  from 
what  it  does  in  another.  So  the  truest  measure  of 
the  quality  of  the  service  in  any  country  is  not 
how  it  compares  with  that  in  others,  but  how  it 
fills  the  requirements  of  the  public  served. 

The  traveler  is  most  interested  in  the  quality  of 
the  passenger — the  shipper  in  the  character  of  the 
freight — service.  Travel  ever  has  been  deemed 
one  of  the  principal  diversions  of  leisure  and  chief 

153 


THE    AMERICAN    TRANSPORTATION    QUESTION 

means  of  culture.  In  our  country  of  magnificent 
distances  and  intense  commercial  activity  much 
of  it  is  also  necessary  to  the  transaction  of  busi- 
ness. Under  rather  unfavorable  conditions  rail- 
way travel  usually  affords  some  pleasure;  and 
under  the  most  favorable  conditions  it  has  its  pro- 
nounced discomforts.  There  are  few  ways  in 
which  we  can  add  more  to  the  pleasure  and  wel- 
fare of  all  than  by  increasing  the  convenience, 
comfort  and  speed,  and  ameliorating  the  incon- 
venience, discomforts  and  danger,  of  passenger 
transportation.  Much  has  been  done  along  this 
line ;  but  there  is  yet  much  to  do. 

The  typical  railway  station  in  the  United  States 
has  been  ugly,  dark  and  dirty.  Within  recent 
years  numerous  fine  and  some  truly  magnificent 
stations  have  been  built.  Every  one  knows  of  the 
great  Pennsylvania  and  New  York  Central  ter- 
minals in  New  York  City;  of  the  Union  terminals 
in  Washington  and  St.  Louis;  of  the  Chicago  & 
Northwestern  terminal  in  Chicago;  of  the  Union 
terminal  now  under  construction  in  Kansas  City. 
The  tendency  to  improve  station  architecture  is 
not  restricted  to  large  cities ;  comfortable  and  at- 
tractive structures  are  being  built  at  many  towns 
and  small  cities.  It  is  a  tendency  meriting  em- 
phatic and  generous  public  encouragement.  It 
does  not  increase  railway  efficiency  from  the 
standpoint  of  the  owners  of  the  railway.  As 
much  business  can  be  done  in  a  station  costing 

154 


EFFICIENCY   AND    PUBLIC   SERVICE 

$500,000  as  in  one  costing  $5,000,000.  But  it  does 
increase  efficiency  from  the  standpoint  of  the 
public,  for  a  commodious  and  beautiful  station 
contributes  to  the  comfort,  delights  the  eye  and 
improves  the  taste  of  all  who  use  it.  In  every 
city  and  town,  for  both  practical  and  esthetic  rea- 
sons, the  railway  stations  should  be  among  the 
most  sanitary,  commodious  and  artistic  buildings. 
It  is  generally  agreed  that  the  best  passenger 
trains  in  the  United  States  are  the  best  in  the 
world.  There  are  usually  three  classes  of  service 
on  European  railways.  Theoretically,  we  usually 
have  only  one,  except  on  certain  railroads.  In 
fact,  however,  on  long  runs  we  have  three:  first, 
that  rendered  on  standard  sleeping  and  parlor 
cars;  second,  that  on  tourist  cars;  and  third,  that 
on  ordinary  day  coaches.  For  the  last  named  only 
the  regular  fare  is  charged.  For  the  others  addi- 
tional tourist  car,  or  parlor,  or  sleeping  car,  rates 
must  be  paid.  Mr.  Edwin  A.  Pratt, ^  an  English 
writer,  who  has  studied  American  railways,  says 
that  in  proportion  to  the  rates  charged  our  ordi- 
nary day  coach  service  is  not  as  good  as  the  third 
class  service  on  English  railways,  but  "comparing 
the  ordinary  American  service,  plus  the  charge  for 
sleeper,  with  the  English  first  class  service,  plus 
the  charge  for  sleeper,  the  advantage  is  in  favor 
of  the  former."     On  the  other  hand,  Mr.  Logan 


'  "American  Railways,"  page  103. 
155 


THK    AMERICAN    TRANSPORTATION    QUESTION 

G.  McPherson/  one  of  the  most  intelligent  Ameri- 
can students  of  European  transportation,  says: 

The  accommodations  provided  for  first  and  second 
class  passengers  on  the  European  railways,  are,  as  a 
rule,  almost  identical;  a  principal  difference  seems  to 
be  in  the  color  of  the  upholstery;  usually,  however, 
there  are  fewer  seats  in  the  first-class  carriages,  so 
that  the  traveler  has  more  elbowroom.  The  accom- 
modations for  third-class  passengers  are  sometimes 
nearly  as  good  as  those  for  second-class,  but  generally 
they  are  much  worse,  so  deficient  in  ordinary  comfort 
that  they  would  not  be  tolerated  in  the  United  States 
by  any  person  able  to  buy  a  railway  ticket.  On  the 
early  morning  and  late  evening  trains  that  carry  work- 
ingmen  into  and  out  of  the  large  cities,  the  third- 
class  cars  have  hard  wooden  benches  upon  which  their 
occupants  may  be  seen  huddling  together,  each  passen- 
ger supporting  the  person  next  to  him  as  they  smoke 
and  sleep  in  the  stifling  atmosphere.  There  is  no 
such  rude  equipment  in  the  United  States,  not  even 
in  the  trains  in  the  mining  and  lumbering  regions.  ^ 

The  suburban  dweller,  or  the  farmer  riding  only 
10  miles  from  his  home  to  the  nearest  county  seat 


'  "Transportation  in  Europe,"  page  89. 

-Very  low  rates  are  made  for  workingmen's  trains  in 
England  and  on  the  Continent,  and  the  traffic  handled  by 
them  is  very  large.  It  is  these  rates  which  are  paid  for 
what  Mr.  McPherson  describes  as  very  poor  service  and  which 
largely  draw  the  average  passenger  rate  in  Europe  down  to 
a  level  so  much  lower  than  the  average  passenger  rate  in 
this  country. 

156 


EFFICIENCY   AND    PUBLIC   SERVICE 

town,  does  not  expect  or  need  the  comforts  pro- 
vided for  those  journeying  from  Chicago  to  the 
Pacific  coast  or  from  New  York  to  Florida.  Mr. 
McPherson  indicates  that  the  local  service  in 
Europe  is  poor.  "On  local  trains  and  in  the  back- 
ward regions,"  he  says,  *'the  passenger  service  is 
an  abomination. "  While  we  have  some  of  the  best 
suburban  service  in  the  world,  it  is  hard  for  me  to 
believe  there  is  any  local  service  in  Europe  that 
is  worse  than  a  good  deal  of  the  local  service  in 
the  United  States.  The  only  excuse  for  the  very 
wide  difference  between  the  kind  of  service  given 
on  our  good  through  trains,  and  on  most  of  our 
local  trains,  is  that  the  traffic  available  for  the 
latter  is  so  small  that  even  the  most  economical 
service  is  apt  to  be  unprofitable.  Of  course,  this, 
again,  is  largely  explainable  by  the  fact  that  the 
density  of  the  passenger  traffic  of  our  railways  is 
much  less  than  that  of  most  European  railways, 
being  about  one-fifth  that  of  the  German  and 
British  railways  and  about  one-fourth  that  of  the 
French  railways. 

In  point  of  frequency  of  passenger  service  none 
of  our  steam  railways,  outside  of  New  England 
and  a  few  other  parts  of  the  East,  will  compare 
with  those  of  the  leading  countries  of  Europe. 
The  passenger  service  in  England  is  2h  times  as 
frequent  as  in  New  York,  Pennsylvania,  New 
Jersey,  Delaware  and  Maryland,  the  region  of  the 
densest  railway  traffic  in  this  country.     It  is  de- 

157 


THE    AMP]RICAN    TRANSPORTATION    QUESTION 

sirable  that  passenger  service  shall  be  made  as 
frequent  as  practicable;  for  frequent  service  con- 
tributes greatly  to  public  convenience.  Where  the 
density  of  population  is  considerable  increased  ser- 
vice creates  a  large  amount  of  new  local  business. 
Even  where  the  rates  of  the  electric  interurban 
lines  have  been  substantially  as  high  as  those  of 
the  steam  roads  the  conveniency  and  frequency  of 
their  service  have  enabled  them  in  many  cases  to 
take  75  to  90  per  cent,  of  the  local  business  from 
the  steam  roads,  and  to  create  a  vast  amount  of 
new  business. 

Passenger  service  often  could  be  made  better 
with  a  reduced  expenditure.  Four  different  rail- 
ways operate  four  trains  daily  each  way  between 
Chicago  and  St.  Louis.  Four  times  a  day  a  quar- 
tette of  trains  departs  and  arrives  at  almost  ex- 
actly the  same  time.  Many  of  them  run  half 
empty.  If  half  of  the  sixteen  were  taken  off  and 
the  schedules  of  the  rest  were  arranged  so  that 
they  would  arrive  and  depart  at  eight  different 
hours  the  service  rendered  to  the  public  would  be 
improved,  while  the  cost  of  rendering  it  would  be 
reduced.  But  if  the  railways  should  enter  into 
an  agreement  to  take  off  part  of  the  trains  and 
start  the  rest  at  such  hours  as  would  better  serve 
the  public  convenience  they  would  be  m.ore  apt  to 
be  criticised  than  commended  for  doing  so — and 
might  be  prosecuted  under  the  Sherman  antitrust 
act  for  combining  in  restraint  of  trade!    There 

158 


EFFICIENCY   AND    PUBLIC   SERVICE 

are  hardly  two  large  cities  in  the  country  between 
which  the  service  could  not  be  improved,  and  at 
the  same  time  its  cost  and  the  economic  waste  in- 
volved in  rendering  it  reduced,  by  taking  off  some 
passenger  trains  and  spacing  the  hours  of  depar- 
ture and  arrival  of  the  rest  farther  apart.  It  is 
no  advantage  to  the  traveler  for  four  trains  to 
leave  for  his  destination  at  the  same  hour;  he  can 
ride  on  only  one  at  a  time. 

One  of  the  chronic  nuisances  on  American  rail- 
ways is  the  late  passenger  train.  Its  frequent 
causing  of  long  v\^aits  at  uncomfortable  stations, 
and  of  the  missing  of  train  connections  and  busi- 
ness and  social  engagements,  has  been  an  impor- 
tant provocative  of  public  irritation.  It  is  not 
confined  to  sections  where  population  is  sparse 
and  traffic  small.  One  of  the  first  duties  done  by 
the  Public  Service  Commission  of  the  Second  dis- 
trict of  New  York  after  its  creation  in  1907  was 
to  investigate  the  passenger  service  of  the  rail- 
ways of  that  state.  Some  of  the  facts  disclosed 
were  very  discreditable  to  railway  management. 
The  Commission  found  a  train  on  one  road  which 
never  reached  its  destination  on  time  in  July  or 
August.  It  found  a  train  on  another  road  which 
was  never  on  time  from  October  20  to  December 
1.  It  found  still  another  on  another  road  which 
was  never  on  time  in  November;  and  yet  another 
on  another  road  that  never  was  on  time  in  Decem- 
ber. 

159 


THE    AMERICAN    TRANSPORTATION    QUESTION 

The  unavoidable  shortcomings  of  a  highly  com- 
plex machine  such  as  the  steam  locomotive,  and 
the  more  avoidable  shortcomings  of  the  men  who 
run  trains,  are  to  blame  for  many  of  them  being 
late.  Competition,  the  prolific  mother  of  so  many 
evils  in  the  railway  business,  is  responsible  for 
many  more.  Competing  railways  differ  in  their 
lengths  between  large  centers,  in  their  grades,  in 
the  condition  of  their  roadbed  and  equipment, 
and,  consequently,  in  the  time  they  can  make. 
If  they  advertised  different  schedules  while  charg- 
ing the  same  rates  the  roads  having  the  faster 
trains  would  get  all  the  business.  Threats  by  the 
weaker  roads — sometimes  executed — to  cut  the 
rates  unless  the  stronger  roads  hold  down  the  run- 
ning times  of  their  trains  result  in  tacit  agree- 
ments under  which  all  make  practically  the  same 
schedules.  The  result  is  that  the  stronger  lines 
do  not  run  their  trains  as  fast  as  they  could,  and 
yet  set  a  pace  that  the  weaker  roads  cannot  keep. 
The  public  does  not  get  as  speedy  service  from 
the  stronger  roads  as  it  is  entitled  to,  and  suffers 
from  trains  being  chronically  late  on  the  weaker 
ones.  The  best  remedy  ever  applied,  perhaps,  is 
the  arrangement  under  which  the  railways  be- 
tween Chicago  and  New  York  are  divided  into  two 
classes,  "standard"  and  "differential,"  the  latter 
charging  a  lower  basic  rate  than  the  former;  the 
rates  via  different  trains  on  the  same  road  vary- 
ing with  their  running  times,  and  the  excess  fares 

160 


EFFICIENCY   AND    PUBLIC   SERVICE 

on  the  faster  trains  being  paid  back  if  they  fail  to 
make  their  scheduled  time. 

The  general  incivility  of  railway  employees  to 
passengers  always  has  been  one  of  the  worst 
shortcomings  of  American  railway  service.  The 
ticket  agent  whose  answers  to  travelers'  questions 
are  curt  and  whose  manner  is  supercilious;  the 
churlish  conductor;  the  waiter  and  porter  who  in- 
spire every  one  with  a  desire  to  break  their  heads; 
the  information  clerk  who  tries  more  to  make  the 
traveler  feel  his  want  of  knowledge  than  to  give 
him  information — are  among  the  railways'  worst 
enemies.^  We  have  all  met  them.  Recently  the 
higher  officers  have  become  acutely  aware  of  the 
extent  to  which  such  employees  irritate  public 
sentiment,  and  numerous  roads  have  been  con- 
ducting campaigns  for  the  education  of  employees 
on  the  subject  of  courtesy.  These  efforts  are  hav- 
ing good  results;  but  much  more  will  be  done  be- 
fore the  traveler  on  American  railways  will  get 
the  sort  of  treatment  which  he  has  a  right  to  de- 
mand and  for  which  he  pays. 

In  the  interest  of  more  economical  operation  it 
is  desirable  that  in  the  freight  service  of  Ameri- 
can railways  there  should  be  substantial  increases 
in  the  tonnage  hauled  per  car  and  per  train  load. 
Both  cars  and  engines  are  able  to  handle  much 
larger  average  loads  than  they  do.     But,  as  I  have 

'  "Railroad  Administration,"  by  Ray  Morris,  page  210. 
161 


TUK    AMERICAN    TRANSPORTATION    QUESTION 

pointed  out  elsewhere,  economical  operation, 
whether  in  the  passenger  or  freight  service,  is 
not  necessarily  efficient  operation.  From  the 
standpoint  of  the  shipper  increased  efficiency 
would  in  many  cases  consist  in  speedier,  more 
regular  and  more  frequent  service.  Probably  the 
service  rendered  in  hauling  the  higher  classes  of 
commodities  between  the  larger  commercial  cen- 
ters of  the  United  States  compares  well  with  the 
similar  service  rendered  in  other  countries.  The 
railway  tariffs  in  the  leading  countries  of  Conti- 
nental Europe  contain  two  sets  of  rates,  one  for 
ordinary,  the  other  for  specially  expedited,  service. 
In  Germany  the  railways  are  required  to  dispatch 
quick-service  freight  from  the  station  within  one 
day  after  receipt,  and  to  carry  it  at  the  rate  of  198 
miles  a  day.  I  have  no  information  as  to  whether 
they  customarily  give  merely  the  minimum  service 
required  or  better  service.  Fast  freight  trains 
run  on  regular  schedules  between  Chicago  and 
New  York,  a  distance  of  1,000  miles,  in  57  hours. 
Similarly,  time  freight  trains  run  on  regular 
schedules  between  Chicago  and  East  St.  Louis,  a 
distance  of  280  miles,  in  15  hours  and  between 
Chicago  and  Kansas  City,  a  distance  of  500  miles, 
in  36  hours.  This  is  typical  of  the  fast  freight 
service  rendered  between  all  our  large  business 
centers. 

The  German  railways  are  required  to  dispatch 
ordinary-service  freight  from  the  station  within 

1G2 


EFFICIENCY   AND    PUBLIC   SERVICE 

two  days  after  receipt,  and  to  transport  it  within 
one  day  to  a  distance  of  at  least  66  miles.  A  fur- 
ther allowance  of  one  day  is  made  for  each  addi- 
tional 132  miles.  If  there  is  delay  for  more  than 
twelve  hours  beyond  these  requirements  portions 
of  the  freight  charge  are  refunded  unless  the  rail- 
ways can  prove  that  no  loss  has  been  sustained  by 
reason  of  the  delay. 

The  fastest  and  most  regular  freight  transporta- 
tion in  the  world  is  that  of  England.  Consign- 
ments of  merchandise  received  at  the  freight 
stations  in  London  up  to  4  p.m.  are  delivered 
throughout  the  country  by  9  o'clock  the  next 
morning.  To  give  this  kind  of  service  it  is  neces- 
sary to  haul  very  much  smaller  car  loads  and  train 
loads  than  those  of  our  railways,  to  run  many  more 
trains  in  proportion,  to  have  many  more  double 
track  and  four  track  lines  over  which  to  run  them, 
and  to  charge  the  shippers  very  much  higher 
rates.  An  engine  cannot  pull  as  much  at  high 
speed  as  at  low  speed,  and  cars  and  trains  cannot 
be  loaded  as  heavily  on  the  average  when  they 
have  to  be  forwarded  on  regular  and  frequent 
schedules  as  when  they  do  not. 

It  is  a  matter  for  serious  consideration  if  Amer- 
ican railways  have  not  increased  the  capacity  of 
their  equipment  unduly,  and  if  the  public  is  not 
pressing  too  hard  its  demands  for  low  rates.  Is 
not  the  sort  of  transportation  efficiency  the  need 
for  which  our  commerce  will  feel  with  increasing 

1G3 


THE    AMERICAN    TRANSPORTATION    QUESTION 

force  that  consisting:;',  not  in  relatively  slow,  infre- 
quent, irregular  and  economical  service,  but  in 
faster,  more  frequent  and  more  regular  service? 
The  former  can  be  rendered  at  less  cost  to  the  rail- 
w^ay  and  lower  rates  to  the  shipper.  But  it  is  not 
improbable  that  the  difference  in  service  is  worth 
the  difference  in  cost.  As  our  country  grows  more 
densely  populated,  and  the  amount  of  short  haul 
traffic  in  the  more  valuable  commodities  increases 
in  proportion  to  the  long-haul  traffic  in  the  less 
valuable,  we  may  conclude  that  a  mean  between 
the  extremes  of  our  present  comparatively  slow 
and  economical  freight  service  and  the  relatively 
fast  and  costly  service  of  England  is  best  adapted 
to  our  commercial  needs. 

Under  normal  business  conditions  the  traffic  of 
the  railways  of  the  United  States  increases  more 
than  100  per  cent,  in  each  decade.'  To  keep  pace 
with  this  wonderful  growth  it  has  been,  and  will 
continue  to  be,  necessary  for  the  roads  to  enlarge 
the  capacity  of  their  plants  greatly  and  at  a  very 
rapid  rate.  The  increases  in  facilities,  and  in  the 
efficiency  with  which  they  were  operated,  did  not 
keep  up  with  the  growth  of  traffic  between  1897 
and  1907.  In  consequence  our  transportation  sys- 
tem broke  down.     The  farmer  was  unable  to  ship 


'  The  increase  in  passenger  traffic  between  1897  and  1907 
was  125  per  cent.,  and  the  increase  in  freight  traffic,  136 
per  cent. 

164 


EFFICIENCY   AND    PUBLIC   SERVICE 

his  wheat  and  saw  it  rot  on  the  ground;  the  man- 
ufacturer could  not  bring  raw  material  to  his  plant 
or  send  finished  goods  from  it;  the  people  of  the 
Northwest  were  threatened  with  starvation  and 
freezing — because  means  were  not  available  for 
moving  the  country's  commerce.  The  volume  of 
freight  traffic  decreased  after  the  panic  of  1907. 
Just  about  that  time  the  many  cars  and  engines  of 
large  capacity  which  the  railways  had  bought 
when  it  was  growing  so  fast,  the  many  new  sid- 
ings that  they  had  built,  and  the  enlargements  of 
yards  and  terminals  that  they  had  made  became 
available.  They  have,  therefore,  been  able  since 
then  to  handle  their  business — including  that  of 
1910,  which  exceeded  in  volume  that  even  of  1907 
—without  the  costly  trouble  and  delays  of  1906  and 
1907.  But  when  prosperous  conditions  return 
commerce  will  again  grow  as  it  did  before  1907; 
and  new  railways  will  have  to  be  built;  much  more 
equipment  will  have  to  be  bought;  and  the  mile- 
age of  second,  third,  and  fourth  track,  and  of  sid- 
ings, yards,  and  terminals,  will  have  to  be  rapidly 
and  largely  increased.  The  greatest,  most  neces- 
sary and  most  expensive  task  of  all  will  be  the 
providing  of  adequate  terminals  in  cities  where 
the  cost  of  real  estate  runs  from  $100,000  to$l,- 
000,000  an  acre.  One  has  but  to  realize  that  the 
railway  managers  of  the  United  States  must  make 
both  their  passenger  and  freight  service  faster 
and  more  regular  and  dependable,  and  at  the  same 
12  165 


THE    AMERICAN    TRANSPORTATION    QUESTION 

time  provide  adequate  facilities  for  satisfactorily 
handling  so  swiftly  augmenting  a  traffic,  to  form 
some  notion  of  the  big  task  before  them.  To  do 
that  task  satisfactorily  they  must  not  merely  im- 
prove railway  operation  in  the  United  States;  they 
must  revolutionize  it. 

While  our  railway  service  has  a  great  many 
needs,  the  greatest  is  that  for  increased  safety. 
As  I  have  already  said,  during  the  fiscal  year  end- 
ing June  30,  1911,  10,396  persons  were  killed  and 
150,159  were  injured  on  the  railways  of  the  United 
States.  Nor  is  that  record,  dark  as  it  is,  the 
blackest.  In  1907  the  number  killed  was  11,839, 
and  the  number  injured  111,016.  These  figures 
tell  their  terrible  and  pitiful  story  in  terms  need- 
ing no  emphasis.  There  is  a  common  impression 
that  not  only  is  our  railway  accident  record  bad, 
but  that  it  has  been  steadily  growing  worse  in 
proportion  to  the  number  of  employees  and  to  the 
amount  of  traffic  handled.  This,  at  least,  is  not 
true.  Between  1900  and  1910  the  passengers  killed, 
per  1,000,000,000  passengers  carried  one  mile,  de- 
creased from  15.56  to  13.03,  or  17  per  cent.,  and  the 
employees  killed,  per  10,000  employees,  decreased 
from  25.07  to  19.9,  or  21  per  cent.  These  figures 
indicate  an  improvement.  Comparisons  of  figures 
for  one  year  with  those  for  another,  however,  sel- 
dom throw  satisfactory  light  on  the  extent  to  which 
changes  are  taking  place  in  railway  affairs.  Com- 
parisons of  period  with  period  are  much  more  apt 

166 


EFFICIENCY    AND    PUBLIC   SERVICE 

to  be  profitable.  Taking  the  most  recent  statistics 
of  the  Interstate  Commerce  Commission  regarding 
accidents/  we  find  that  in  the  four-year  period 
ending  June  30,  1907,  the  number  of  passengers 
killed  was  2,002  and  in  the  four-year  period  end- 
ing June  30,  1911,  it  was  1,513,  a  reduction  of  25 
per  cent.  Similarly,  in  the  former  period  the 
number  of  employees  killed  was  16,810,  and  in  the 
latter,  13,875,  a  reduction  of  18  per  cent. 

The  Commission's  statistics  show  a  larger  pro- 
portionate increase  in  injuries  than  in  fatalities 
since  both  ten  and  twenty  years  ago;  but  this  is 
rather  because  a  proportionately  larger  number  of 
injuries  is  reported  now  than  that  a  proportionately 
larger  number  occurs. 

There  is,  however,  no  room  for  question  that 
the  accident  record  of  our  railways  is  still  very 
bad.  It  is  the  worst  made  by  the  railways  of  any 
first-class  country.  But  candid  analysis  of  the 
facts  is  prerequisite  to  understanding  of  them  or 
intelligent  suggestion  of  remedies;  and  while 
they  are  the  subject  of  much  denunciation,  they 
are  the  subject  of  very  little  discriminating 
analysis. 

The  following  table  gives  the  total  railway  ac- 
cidents in  the  United  States  in  the  year  ending 
June  30,  1911,  as  reported  by  the  Interstate  Com- 
merce Commission: 

'  Accident  Bulletin  No.  40. 
167 


THE    AMERICAN    TRANSPORTATION    QUESTION 

Total  Kailway  Accidents,  Yeak  Ended  June  30,  1911. 

I.  Train  accidents:  Killed.  injured. 

Passengers 356  13,433 

Trespassers 5,284  5,(514 

Employees 3,163  46.802 

Other  Persons 1,154  5,073 

9,957  70,922 

II.  Industrial  accidents  to  employees.       439  79,237 

Totals 10,396  150,159 

The  significant  column  in  the  table  is  that 
headed  "killed."  An  injury  may  mean  the  loss 
of  a  leg,  or  merely  the  bruising  of  a  thumb. 
Whether  it  shall  be  reported  at  all  may  depend  on 
the  judgment  of  the  person  making  the  report  as 
to  what  really  is  an  injury;  the  criterion  usually 
applied  in  the  case  of  employees  is  whether  tht 
employee  is  disabled  for  work  for  three  days  out 
of  the  ten  immediately  following  the  accident. 
On  the  other  hand,  a  fatality  is  a  constant  quan- 
tity and  therefore  is  sure  to  be  reported.  In  our 
analysis  we  shall,  consequently,  confine  ourselves 
to  the  statistics  for  persons  who  were  killed. 

It  will  be  seen  that  51  per  cent,  of  those  killed 
in  all  accidents  were  reported  by  the  Interstate 
Commerce  Commission  as  "trespassers."  As  the 
Commission  says,  they  were  persons  who  were 
stealing  rides  on  trains  or  walking  on  railway 
tracks.  These  unlawful  intruders  on  the  property 
of  railways  usually  make  more  than  one-half  of 
the  number  killed.  On  the  average  fourteen  tres- 
passers are  killed  on  the  railways  of  the  United 

168 


EFFICIENCY   AND    PUBLIC   SERVICE 

States  every  day  in  the  year.  In  European  coun- 
tries trespassers  are  arrested  and  fined  or  impris- 
oned, both  to  protect  the  roads  and  in  the  interest 
of  public  safety.  For  the  casualties  to  this  class 
of  persons  in  the  United  States  the  public  is 
chiefly  responsible.  As  individuals  it  has  per- 
sisted in  using  railw^ay  tracks  as  highways,  despite 
the  fact  that  this  is  obviously  hazardous;  and  in 
its  collective  capacity  it  has  persistently  refused 
to  pass  and  enforce  laws  to  stop  trespassing,  al- 
though this  is  the  only  way  it  can  be  done.  It  is 
a  stigma  on  the  American  public  that  it  has  de- 
nounced and  attacked  every  abuse  for  which  the 
railway  managers  have  been  responsible,  but  has 
refused  to  do  anything  to  stop  this  great  evil  of 
trespassing,  for  which  it  is  responsible.  The 
streets  of  Jerusalem  are  said  to  have  been  kept 
clean  by  each  man  sweeping  before  his  own  door. 
The  American  people  in  their  dealings  with  rail- 
ways might  well  follow  this  venerable  example. 

It  is  a  common  impression  that  most  of  the  per- 
sons who  are  killed  in  railway  accidents  are  pas- 
sengers, and  that  most  passengers  are  killed  in 
true  train  accidents,  such  as  collisions  and  derail- 
ments. The  table  shows  that  only  356,  or  but  3.4 
per  cent,  of  the  total  persons  killed  were  passen- 
gers. The  railways  annually  carry  almost  1,000,- 
000,000  passengers  an  average  of  about  33  miles. 
This  is  equivalent  to  hauling  every  inhabitant  of 
the  country  about  350  miles.     The  total  number  of 

169 


THM    AMERICAN    TRANSPORTATION    QUESTION 

passengers  killed  in  collision  and  derailments  in 
1911  was  141,  or  only  1.3  per  cent,  of  the  total  per- 
sons killed  in  all  accidents,  and  but  2.6  per  cent,  as 
many  as  the  number  of  trespassers  killed.  One 
hundred  and  thirty-one  passengers  were  killed 
while  getting  on  or  off  trains,  locomotives  or  cars, 
or  by  falling  from  them.  Thirty-nine  were  killed 
by  being  struck  or  run  over  by  engines  or  cars  at 
stations  or  yards.  The  deaths  of  the  rest  were 
due  to  miscellaneous  causes.  Only  142  of  the  total 
of  356  were  killed  in  true  train  accidents. 

About  33,000,000,000  passengers  were  carried 
one  mile  in  1911.  Therefore,  the  average  passen- 
ger could  travel  60  miles  an  hour  for  216  years,  or 
around  the  earth  4,584  times,  without  meeting  with 
a  fatal  train  accident.  On  this  showing,  the  perils 
of  riding  on  American  trains  are  not  so  great  as 
newspaper  accounts  of  accidents  would  indicate. 

About  30  per  cent,  of  the  fatalities  on  railways 
are  suffered  by  employees.  The  total  number  of 
them  killed  in  1911  was  3,602.  Of  these,  209  were 
killed  while  coupling  and  uncoupling  cars,  in  spite 
of  the  fact  that  99.3  per  cent,  of  the  locomotives 
and  cars  in  service  have  been,  at  heavy  expense, 
equipped  with  automatic  couplers.  One  thousand 
four  hundred  and  twenty-nine  were  killed  by  be- 
ing struck  or  run  over  by  engines  or  cars,  which, 
of  course,  were  being  operated  by  their  fellow  em- 
ployees. One  hundred  and  ninety-seven  were 
killed  while  getting  on   or  off  cars  or  engines. 

170 


EFFICIENCY   AND    PUBLIC   SERVICE 

Three  hundred  and  ninety-one  were  killed  by  fall- 
ing from  trains,  locomotives  or  cars.  The  deaths 
of  439,  and  the  injuries  to  79,237,  or  a  majority  of 
the  total  number  injured,  were  due  to  ''industrial 
accidents,"  resulting  from  the  handling  of  tools, 
machinery,  supplies,  etc.,  getting  on  or  off  locomo- 
tives and  cars  while  at  rest,  and  from  other  causes 
not  at  all  connected  with  the  movement  of  trains. 
The  foregoing  figures  account  for  over  70  per  cent, 
of  the  fatalities  to  employees.  The  total  number 
whose  deaths  resulted  from  collisions  and  derail- 
ments, from  locomotives  and  cars  breaking  down, 
etc. — in  other  words,  from  true  train  accidents — 
was  633,  or  but  17  per  cent,  of  the  total.  The 
number  of  persons  killed  at  highway  grade  cross- 
ings was  992,  of  whom  124  were  described  by  the 
Interstate  Commerce  Commission  as  ''trespassers. " 

The  injuries  and  fatalities,  aside  from  those  to 
trespassers,  are  due  to  three  general  causes:  (1) 
Shortcomings  of  railway  operating  rules  and  meth- 
ods; (2)  defects  of  railway  plants;  (3)  lack  of 
proper  discipline,  manifested  by  failure  of  em- 
ployees to  obey  the  rules  of  the  companies  and  the 
orders  of  their  superiors. 

Probably  the  smallest  number  is  owing  to  the 
first-mentioned  cause.  The  American  Railway 
Association  has  developed  a  code  of  operating 
rules  which,  if  employees  would  obey  them,  would 
make  most  accidents  impossible.  There  are,  how- 
ever, some  serious  shortcomings  in  the  rules  used. 

171 


THE    AMERICAN    TRANSPORTATION    QUESTION 

The  block-signaling  rules,  for  example,  are  not  as 
nearly  uniform  as  they  should  be.  Trainmen  of- 
ten go  from  the  employ  of  one  road  to  that  of  an- 
other; and  owing  to  this  lack  of  uniformity,  and 
consequent  mistakes  on  their  part,  accidents  some- 
times result.  There  are  places  where  as  many  as 
three  railways  are  operating  under  trackage  rights 
over  the  same  track  under  three  different  sets  of 
rules.  The  danger  of  this  is  plain.  Sometimes, 
too,  the  companies  have  good  enough  rules  but 
impose  requirements  for  the  movement  of  trains 
that  make  it  very  difficult  for  employees  at  once 
to  meet  these  requirements  and  obey  the  rules. 

Again,  many  accidents  are  due  to  defects  of  rail- 
way plants.  The  Master  Car  Builders'  Associa- 
tion, by  years  of  intelligent  and  earnest  work, 
developed  an  excellent  set  of  standard  safety  ap- 
pliances for  cars,  but  a  good  many  individual 
roads,  for  one  reason  or  another,  refused  to  equip 
their  cars  according  to  one  or  more  of  these  stand- 
ards. The  result  was  the  passage  in  1910  of  a 
federal  law  requiring  the  Interstate  Commerce 
Commission  to  specify  the  standards  to  be  used. 
Similarly,  every  one  knows  that  the  only  way  to 
stop  accidents  at  highway  crossings  is  to  protect 
them  with  watchmen,  gates  or  electric  bells,  or, 
better  still,  especially  where  the  traffic  is  dense, 
entirely  to  eliminate  the  crossings  by  separating 
the  grades;  but  the  railways  are  slow  to  do  these 
things  voluntarily.    The  block  signal  system — i.e., 

172 


EFFICIENCY   AND    PUBLIC   SERVICE 

the  system  of  maintaining  in  one  way  or  an- 
other a  space  interval  between  trains — is  the  best 
means  yet  devised  to  prevent  collisions,  and  block 
signals  ought  rapidly  to  be  installed  on  every  rail- 
way; but  while  the  total  mileage  operated  in  the 
United  States  is  about  240,000  miles,  the  mileage 
operated  with  block  signal  protection  on  January 
1,  1911,  was  only  about  72,000  miles,  or  about  30 
per  cent,  of  the  total.  Of  this,  about  18,000  miles 
was  automatic  and  about  54,000  miles  non-auto- 
matic. 

We  shall  never  have  safe  transportation  until  all 
these  and  numerous  other  shortcomings  of  the  op- 
erating rules,  methods  and  plants  of  the  railways 
have  been  remedied.  But  improvements  in  plants 
and  rules  of  operation  will  not  alone  make  trans- 
portation safe.  Failures  of  the  human  element 
cause  most  accidents;  and  you  cannot  abolish  the 
human  element  in  railway  operation,  nor  prevent 
its  failure  from  causing  accidents,  with  any  num- 
ber of  automatic  devices.  There  is  a  vein  of  reck- 
lessness in  Americans;  we  chafe  under  restraint; 
we  like  to  ''take  a  chance."  This  leads  many  em- 
ployees to  disregard  rules  and  orders,  and  "take  a 
chance"  with  the  limbs  and  lives  of  others,  as  well 
as  with  their  own.  To  check  this  tendency  several 
railways  have  made  use  of  ''surprise  signal  tests" ; 
that  is,  one  or  more  officers  go  out  on  the  line  and 
set  signals  against  the  enginemen  and  note  the 
vigilance  with  which  they  observe  them  and  the 

173 


THE    AMERICAN    TRANSPORTATION    QUESTION 

promptitude  and  strictness  with  which  they  obey 
them.  The  result  usually  has  been  to  cause  much 
stricter  obedience  and  increased  safety. 

Unfortunately,  however,  while  discipline  is  as 
essential  to  safe  operation  on  a  railway  as  to  vic- 
torious fighting  by  an  army,  it  grows  increasingly 
hard  to  enforce  it  on  American  railways.  The 
brotherhoods  of  train  employees  are  the  strongest 
labor  unions  in  the  world.  They  are  composed  of 
the  most  intelligent  and  best  paid  workingmen  in 
the  world.  In  many  ways  they  are  the  best  labor 
unions  in  the  world.  But,  unfortunately,  they 
have  not  heretofore  exerted  themselves  to  promote 
the  efficiency  and  safety  of  railway  operation. 
Indeed,  their  influence  has  been  in  the  opposite 
direction.  They  have  insisted  on  the  rule  of  sen- 
iority in  promotion,  the  effect  of  which  is  to  put 
the  oldest  employees  in  the  most  responsible  places 
in  the  service,  whereas  the  public  welfare  requires, 
in  the  interest  both  of  efficiency  and  of  safety, 
that  the  most  competent  shall  be  given  such  posi- 
tions; and  it  does  not  follow  in  any  trade,  business 
or  profession  that  the  most  experienced  will  be 
the  most  competent.  The  brotherhoods  have  been 
very  successful  in  getting  ever  higher  wages  for 
their  members,  and  I,  for  one,  would  be  glad  of  it 
if  only  their  influence  tended  to  increase  the  quan- 
tity and  quality  of  the  work  done  for  these  high 
wages.  Similarly,  they  have  made  concerted  and 
successful  efforts  to  get  legislation  requiring  rail- 

174 


EFFICIENCY   AND    PUBLIC    SERVICE 

ways  to  install  safety  appliances,  to  increase  the 
number  of  men  in  train  crews,  to  limit  the  hours 
of  labor;  but  they  have  made  no  concerted  efforts 
to  get  their  members  to  so  act  as  to  increase  the 
safety  of  transportation.  On  the  contrary,  when 
an  employee  has  committed  a  violation  of  rules  or 
orders  that  has,  or  might  have,  caused  an  accident, 
and  the  railway  superintendent  tries  to  administer 
exemplary  punishment,  he  is  sure  to  be  waited  on 
by  a  committee  from  the  man's  brotherhood  who 
will,  if  needful,  carry  his  case  to  the  highest  offi- 
cers of  the  road;  and  over  and  over,  because  either 
tacitly  or  by  express  words  a  strike  is  threatened, 
the  management  weakly  yields,  although  it  knows 
that  thereby  discipline  will  be  impaired.  Repeat- 
edly strikes  have  been  not  only  threatened,  but 
declared,  to  protect  men  whose  indefensible  con- 
duct has  endangered  the  limbs  and  lives  of  hun- 
dreds; and  usually  a  misguided  public  opinion  has 
sided  with  the  men  instead  of  with  the  manage- 
ment which  was  acting  in  the  public  interest. 

To  educate  the  public  about  the  true  causes  of 
accidents  the  operating  departments  of  the  Union 
Pacific  System  and  the  Southern  Pacific  Company 
— the  "Harriman  Lines" — have  adopted  the  pol- 
icy, when  an  accident  occurs,  of  impanelling  a 
board  of  inquiry,  composed  of  their  division  offi- 
cers and  representative  citizens — local  newspaper 
men  being  preferred — of  having  this  board  make 
a  searching  investigation  of  the  cause  of  the  acci- 

175 


THE    AMERICAN    TRANSPORTATION    QUESTION 

dent,  and  of  then  giving  widespread  publicity,  on 
bulletin  boards  at  stations,  shops,  etc.,  and  through 
the  press,  to  the  facts  disclosed  and  the  identity 
of  those  at  fault,  whether  officers  or  employees. 
This  is  adapted  both  to  educate  public  sentiment, 
and  to  cause  employees,  because  of  fear  of  disclos- 
ure of  their  misconduct  and  public  condemnation 
of  it,  to  be  more  careful. 

The  Chicago  &  North-Western,  for  the  purpose 
of  removing  the  causes  of  accidents,  has  organized 
"Committees  of  Safety"  on  every  division,  com- 
posed of  both  officers  and  employees,  whose  duty 
it  is  to  go  over  the  line  at  frequent  intervals  and 
investigate  both  the  condition  of  the  railway 
plants  and  the  conduct  of  employees.  This  is 
bringing  about  needful  cooperation  between  man- 
agement and  men  which  must  have  wholesome 
results. 

No  one  who  investigates  the  subject  of  railway 
accidents,  intelligently  and  without  bias,  can 
reach  any  conclusion  but  that  cooperation  between 
the  public,  railway  managements  and  railway  em- 
ployees is  essential  to  their  reduction.  The  public 
should  first  perform  its  duty  of  passing  and  en- 
forcing laws  against  trespassing.  It  should  allow 
the  railways  to  earn  enough  money  to  make  needed 
improvements  in  their  plants  and  should  then 
compel  them  to  make  them.  And,  it  should  hold 
railway  employees  to  a  stricter  accountability  for 
the  performance  of  their  duty. 

176 


EFFICIENCY   AND    PUBLIC   SERVICE 

The  railway  owes  special  duties  to  the  public 
because  it  is  a  public  service  corporation.  It  is 
not  merely  the  superintendents,  the  general  man- 
agers, the  presidents  and  other  officers  who  assume 
a  part  of  this  duty  when  they  enter  the  service; 
every  employee,  from  the  conductors  and  locomo- 
tive engineers  to  the  track  laborers,  does  so;  and 
when  employees  organize  themselves  into  brother- 
hoods these  become  morally,  although  not  legally, 
just  as  truly  ''public  service"  institutions  as  the 
railway  corporations.  They  have  no  more  moral 
right  to  cause  a  cessation  of  the  railway's  public 
service  by  striking  than  the  management  has  by 
locking  them  out;  they  have  no  more  moral  right 
to  make  the  railway's  service  unduly  expensive  by 
insisting  on  unreasonable  conditions  of  employ- 
ment or  excessive  wages  than  the  management 
has  by  charging  excessive  rates;  and  it  is  just  as 
much  their  duty  as  that  of  the  management  to  do 
all  they  can  to  make  transportation  safe  and  to  re- 
frain from  doing  anything  that  will  make  it  un- 
safe. The  railway  brotherhoods  have  become  a 
powerful  imperium  in  imperio;  and  the  public  will 
not  be  as  economically,  efficiently  and  safely  served 
as  it  ought  to  be  until  it  clearly  recognizes  the 
duty  of  the  brotherhoods  to  it,  and  makes  them 
recognize  that  duty  and  strictly  live  up  to  it. 


CHAPTER  IX 

RAILWAYS    AND    INLAND    WATERWAYS:    COSTS 
OF   RAIL   AND    WATER   TRANSPORTATION 

Waterway  routes  may  be  roughly  divided  into 
two  classes:  (1)  Transoceanic  routes  which  afford 
the  only  means  of  transportation  between  coun- 
tries or  parts  of  countries  entirely,  or  almost  en- 
tirely, separated  by  the  sea;  and  (2)  coastwise  and' 
inland  routes,  which  may  be  used  alternatively 
with  railways/  The  railways  are  naturally  con- 
nections, rather  than  competitors,  of  the  transoce- 
anic routes.  While  they  are  often  connections, 
they  are  more  commonly  competitors,  of  the  coast- 
wise and  inland  water  routes.  -    The  transoceanic 

'  This  classification  is  not  exact,  for  transoceanic  routes 
afford  the  only  practical  means  of  transportation  between 
some  countries  which  are  connected  by  land ;  such,  for  ex- 
ample, as  the  United  States  and  Argentina,  or  France  and 
China — but  it  is  sufficiently  accurate  for  my  purpose. 

-There  is,  however,  much  more  competition  between  the 
railways  and  the  transoceanic  routes  than  is  generally 
known.  For  example,  goods  originating  at  New  York  and 
other  points  on  the  Atlantic  seaboard  may  move  to  the 
Orient  either  eastward  across  the  Atlantic  Ocean,  through 
the  Mediterranean  and  through  the  Suez  Canal,  or  westward 
by  rail  across  the  United  States  and  then  across  the  Pacific 
Ocean.    There  formerly  was  active  competition  between  the 

178 


RAILWAYS   AND    INLAND   WATERWAYS 

routes  being  the  only  means  for  handling  most  of 
our  foreign  commerce,  it  follows  that  if  we  desire 
that  commerce  handled  satisfactorily  we  have  no 
choice  but  adequately  to  develop  our  harbors  and 
otherwise  give  necessary  encouragement  to  trans- 
oceanic traffic.  Coastwise  and  inland  water  routes, 
being  alternative  and  competitive  with  railways, 
it  is  an  important  question  of  public  policy  to  what 
extent  the  public,  to  secure  good  and  ample  facili- 
ties for  transportation  between  the  different  parts 
of  the  United  States,  should  give  encouragement 
to  the  development  of  coastwise  and  inland  water 

transatlantic  steamship  lines  and  the  transcontinental  rail- 
ways of  the  United  States  for  this  traffic ;  and  the  railways 
and  the  Pacific  Ocean  steamship  lines  often  made  as  low  or 
lower  rates  from  the  Atlantic  seaboard  to  the  Orient  as  the 
railways  made  for  the  transportation  of  the  same  commodi- 
ties from  New  York  to  the  Pacific  coast.  The  Interstate 
Commerce  Commission  ruled  that  the  roads  must  publish 
separately  in  their  tariffs  the  amounts  that  they  received 
for  hauling  to  the  Pacific  coast  goods  destined  to  the  Orient. 
All  of  the  railways  in  the  United  States  which  then  reached 
the  Pacific  coast  replied  that  they  ought  not  to  be  required 
to  do  this,  contending  that  all  the  shipper  was  interested  in 
was  the  combined  through  rate  of  the  railways  and  of  the 
steamship  lines ;  that  the  proportions  of  the  through  rates 
received  by  the  roads  barely  covered  their  operating  ex- 
penses ;  and  that  if  they  were  published  they  would  be  in- 
vidiously compared  with  the  rates  that  the  roads  were  re- 
ceiving for  the  transportation  of  goods  locally  to  the  Pacific 
coast.  As  the  Commission  insisted  on  obedience  to  its  rul- 
ing the  roads  withdrew  their  low  proportions  of  the  through 
rates  on  Oriental  traffic,  making  them  the  same  as  their 
domestic  rates  to  the  Pacific  coast.    The  Chicago,  Milwaukee 

179 


THE    AMERICAN    TRANSPORTATION    QUESTION 

routes,  on  the  one  hand,  and  rail  routes,  on  the 
other.  There  has  been  recently  much  demand  for 
additional  development  of  inland  waterways  by 
the  federal  government.  A  project  for  the  con- 
struction of  a  waterway  14  feet  deep,  or  more, 
from  the  Great  Lakes  to  the  Gulf  of  Mexico  has 
received  widespread  support.  This  main  project  is 
supplemented  by  numerous  minor  ones,  including 
the  deepening  of  the  Mississippi  River  to  St.  Paul 
and  of  its  various  tributaries,  and  of  other  rivers  in 
all  parts  of  the  country;  the  construction  of  a  ship 
canal  to  connect  the  lower  end  of  Lake  Michigan 

&  St.  Paul  Railway,  after  it  built  its  extension  to  the  coast 
(the  Chicago,  Milwaukee  &  Pug-et  Sound),  made  low  through 
rates  to  the  Orient  in  connection  with  the  steamship  lines 
and  published  its  inland  proportions  of  these  rates.  But 
the  other  transcontinental  railways  continue  to  charge  the 
same  rates  to  the  coast  on  export  business  as  they  do  on 
domestic  business. 

Again,  a  large  amount  of  grain  is  carried  from  the  Pa- 
cific coast  via  the  ocean  around  Cape  Horn  to  Europe.  On 
their  return  trips  the  vessels  engaged  in  this  traffic  make 
very  low  rates  on  numerous  commodities  in  order  to  get  at 
least  enough  lading  for  ballast.  Among  the  commodities 
on  which  these  rates  are  made  are  cement,  and  iron  and 
steel  articles.  The  railways  have  to  fix  their  rates  on  these 
commodities  from  points  in  the  United  States  to  the  Pacific 
coast  with  reference  to  this  transoceanic  competition  in 
order  to  enable  the  American  shipper  to  sell  his  goods  on  the 
Pacific  coast  in  competition  with  the  European  shipper. 

I  should  like  to  hear  some  advocate  of  the  distance  and 
the  cost-of-service  bases  of  ratemaking  tell  how  the  roads 
could  make  rates  on  these  bases  and  meet  this  sort  of  com- 
petition ! 

180 


RAILWAYS   AND    INLAND   WATERWAYS 

with  Lake  Erie;  the  construction  of  a  ship  canal 
from  Lake  Erie  to  the  Atlantic  Ocean,  etc.  To 
finance  these  great  works  it  has  been  proposed 
that  Congress  shall  vote  a  bond  issue  of  $500,000,- 
000,  which  amount  shall  be  spent  at  the  rate  of 
$50,000,000  annually  until  exhausted. 

The  three  chief  arguments  made  for  this  plan 
are  (1)  that  it  would  cheapen  transportation;  (2) 
that  it  would  regulate  railway  freight  rates;  and 
(3)  that  it  would  provide  in  the  best  way  needed 
additional  facilities  of  transportation.  There  are 
various  incidental  benefits  that  it  is  contended 
waterway  development  would  confer.  It  is  per- 
haps not  necessary  to  notice  them  here,  however; 
for  if  it  can  be  shown  that  development  of  water- 
ways is  desirable  for  transportation  reasons,  no 
citation  of  incidental  advantages  it  would  bestow 
is  necessary  to  make  out  a  case  for  it;  and  if  the 
opposite  can  be  shown,  it  must  follow  that  the 
incidental  benefits  it  would  confer,  such  as  the  re- 
clamation of  overflowed  land  along  our  rivers, 
should  be  sought  by  some  less  expensive  means 
than  the  digging  of  14  or  20  foot  channels. 

When  it  is  said  that  the  proposed  works  would 
cheapen  transportation  it  is  usually  meant  that 
they  would  furnish  means  by  which  commodities 
could  be  carried  at  less  cost  than  they  can  now,  or 
probably  can  in  future  be  carried  by  railway.  In 
support  of  this,  the  freight  rates  of  boats  on  the 
ocean  and  the  Great  Lakes,  which  are  much  less 
13  181 


THE    AMERICAN    TRANSPORTATION    QUESTION 

than  those  of  the  railways  of  the  United  States,  are 
frequently  cited.  The  most  costly  parts  of  a  rail- 
way's plant  to  build  and  maintain  are  its  roadway 
and  terminals;  and  the  physical  limitations  they 
put  on  the  size  and  capacity  of  the  vehicles  that 
can  be  used  cause  a  large  part  of  the  expense  of 
operating  railways.  Nature  provided  for  ocean 
and  lake  boats  roadways  which  have  none  of  the 
physical  limitations  of  a  railway's  roadway;  and 
nature,  aided — and  properly  so — by  government, 
provides  and  maintains  the  harbors  which  serve 
as  their  terminals.  There  can  be  no  question  that, 
in  consequence,  well-managed  steamship  lines  in 
our  coastwise  and  Great  Lakes  traffic  can  gener- 
ally haul  goods  more  cheaply  than  railways.  The 
case  of  artificial  waterways,  including  under  this 
term  both  canals  and  improved  rivers,  is  very  dif- 
ferent. Expenditures  analogous  to  those  for  the 
construction  and  maintenance  of  a  railway's  road- 
way must  be  made  on  them ;  and  the  expenses  of 
operation  caused  by  the  physical  limitations  of 
their  channels  are  comparable  to  those  caused  by 
the  limitations  of  a  railway's  track. 

It  follows,  that  data  about  the  cost  of  transpor- 
tation on  the  ocean  and  the  Great  Lakes  has  no 
bearing  on  the  expediency  of  digging  canals  or 
canalizing  rivers.  The  question  to  be  determined 
in  the  consideration  of  that  problem  is,  not  the 
relative  cheapness  of  transportation  by  rail  and  on 
natural  waterways,  but  the  relative  cheapness  of 

182 


RAILWAYS   AND    INLAND    WATERWAYS 

transportation   by   rail   and    on    artificial  water- 
ways. 

Nor  is  the  question  whether  transportation  on 
waterways  ca;n  be  made  cheaper  than  on  railways 
to  the  shipper  the  one  properly  to  be  considered,  as 
is  very  commonly  assumed.  The  true  question  is 
whether  the  total  cost  of  transportation  can  be 
made  less.  The  rates  that  shippers  pay  to  the  rail- 
ways cover  the  total  cost  of  rail  carriage.  The 
rates  that  shippers  pay  to  boats  cover  only  the  cost 
and  profit  of  operating  the  boats.  To  arrive  at  the 
total  cost  of  water  transportation,  to  the  charges 
of  the  boats  must  be  added  what  the  public  ex- 
pends on  the  waterways.  It  might  be  that  the 
average  rate  by  rail  on  commodities  adapted  to 
water  transportation  would  be  5  mills  per  ton  per 
mile,  and  by  boat  only  4  mills,  and  yet  that,  be- 
cause of  taxes  paid  by  the  public  to  defray  inter- 
est and  maintenance  charges  on  the  waterways 
amounting  to  2  mills  per  ton  per  mile,  the  total 
cost  of  transportation  by  water  would  be  greater 
than  the  cost  by  rail.  Transportation  would  not 
then  have  been  cheapened  by  waterway  develop- 
ment. It  would  merely  have  been  cheapened  to 
the  shipper.  And  it  could  have  been  cheapened 
equally  to  the  shipper  with  50  per  cent,  less  ex- 
pense to  the  public,  if  the  government,  instead  of 
developing  waterways,  had  paid  a  bounty  of  1  mill 
per  ton  mile  on  shipments  sent  by  rail  equal  in 
amount  to  those  carried  by  water. 

183 


THK    AMERICAN    TRANSPORTATION    QUESTION 

Wc  can  best  aiTive  at  a  rational  conclusion  as  to 
whether  further  development  of  rivers  and  canals 
in  the  United  States  would  cheapen  transportation 
here  by  studying  the  past  experience  of  this  and 
other  countries.  Now,  while  the  traffic  of  the 
coastwise  routes,  the  Great  Lakes  and  the  railways 
of  the  United  States  has  grown  rapidly,  that  of 
most  of  the  canals  and  rivers  of  this  country  has 
for  some  years  declined.  The  commerce  on  all  our 
inland  waterways,  except  the  Great  Lakes,  in  1889 
was  40,600,000  tons;  and  in  1906,  only  31,800.000 
tons,  a  decrease  of  21i  per  cent.^  The  advocates 
of  waterway  development  reply  that  the  canals 
and  rivers  of  the  United  States  have  not  been  able 
to  hold  their  own  because  they  have  not  been  suf- 


'  It  is  often  said  that  our  merchant  marine  is  declining. 
This  statement  is  not  exactly  correct.  The  tonnage  of 
American  vessels  engaged  in  foreign  commerce  declined 
from  1,269,681  tons  in  1883  to  878,523  tons  in  1909,  or  over 
30  per  cent.  Meantime,  the  tonnage  of  vessels  engaged  in 
coastwise  traffic  increased  from  2,838,354  tons  to  6,451,042 
tons,  or  127  per  cent.  ("Statistical  Abstract  of  the  United 
States,"  1909,  page  302).  The  net  tons  of  freight  carried 
by  coastwise  vessels  on  the  Atlantic  coast  and  the  Gulf  of 
Mexico  increased  from  52,712,124  tons  in  1889  to  140,512,043 
tons  in  1906,  or  166  per  cent.  ;  and  on  the  Pacific  coast,  in- 
cluding Alaska,  from  11,249,927  tons  to  17,622,816  tons,  or 
56  per  cent.  The  vessel  tonnage  on  the  Great  Lakes  and 
the  St.  Lawrence  River  increased  from  920,294  in  1889  to 
2,392,863  in  1906,  or  160  per  cent.  Meantime  the  net  tons 
carried  increased  from  25,266,974  to  75,609,649,  or  199  per 
cent.  ("Special  Report  on  Transportation  by  Water,  1906," 
by  the  Bureau  of  the  Census,  pages  14  and  33.) 

184 


RAILWAYS   AND    INLAND    WATERWAYS 

ficiently  developed,  and  because  the  railways  have 
used  unfair  methods  of  competition.  They  call 
attention  to  the  fact  that  while  the  traffic  on  our 
rivers  and  canals  has  been  declining,  the  com- 
merce on  the  rivers  and  canals  of  Europe  has  been 
growing  faster  than  on  the  railways  of  Europe. 
The  principal  inland  waterways  of  Europe  are 
those  of  Belgium,  Germany  and  France.  The  ton- 
nage carried  on  the  waterways  of  Belgium  in- 
creased 115  per  cent,  between  1888  and  1905,  while 
the  tonnage  on  the  railways  increased  only  62  per 
cent.  The  ton-miles  of  traffic  carried  on  the 
waterways  of  France  increased  154  per  cent,  be- 
tween 1880  and  1905,  while  the  ton-miles  of  traffic 
on  its  railways  increased  only  72  per  cent.  The 
ton-miles  of  traffic  on  the  waterways  of  Germany 
increased  211  per  cent,  between  1885  and  1905, 
while  the  traffic  on  German  railways  increased 
only  168  per  cent.^    Data  such  as  these,  it  is  ar- 

'  The  following  tables,  compiled  from  Volume  VI  of  the 
Report  of  the  Royal  Commission  on  Canals  and  Waterways, 
show  the  comparative  mileage  and  the  comparative  tonnage 
of  the  railways  and  waterways  of  Belgium,  France  and  Ger- 
many. It  should  be  noted  that  these  figures  are  for  tonnage 
and  not  ton  miles.      •• 

Belgium. 

Year  Length  (in  Miles).  Tonnage  (in  1,000  Tons). 

■  Waterways.      Railways.  Waterways.        Railways. 

1888 998.4  2,364.7  24,836  40,352 

1890 1,018.2  2,378.4  25,242  42,990 

1895 1,009.7  2,407.8  30,242  46,664 

1900 1,015.6  2,881.2  38,178  55,108 

1903 1,015.6  2,874.4  49,020  59,297 

1905 1,015.6  2,873.8  53,345  65,319 

{Continued  at  .  n'ln  :i  i,f  j;  j-<  page.) 

185 


THIO    AMERICAN    TRANSPORTATION    QUESTION 

gued,  show  that  wherever  inland  waterways  are 
properly  developed  and  not  subjected  to  unfair 
competition  they  furnish  service  and  rates  that 
attract  most  of  the  bulky  commodities. 

On  the  other  hand,  some  students  of  the  subject 
contend  that  the  more  thoroughly  rail  and  water 
transportation  in  Europe  and  in  the  United  States 
are  investigated  the  more  we  shall  be  convinced 
that  the  experience  of  Europe  affords  no  evidence, 
at  least,  that  the  total  cost  of  canal  or  river  trans- 
portation can  be  made  less  than  the  cost  of  rail 
transportation  is  in  the  United  States. 

The  British  Royal  Commission  on  Canals  and 
Waterways  issued  late  in  1909  a  comprehensive 

France. 

Yp.r>  Length  (in  Miles).  Tonnage  (in  l.CXX)  Tons). 

Waterways.       Railways.  Waterways.        Railways. 

1880 6,782  14,315  18,000  80,774 

1885 7,676  18,500  19,573  75,192 

1890 7,670  20,634  24,167  92.506 

189b 7,614  22,469  27,174  100,834 

1900 7,533  23,436  32,446  126,830 

1903 7,589  24,149  33,340  129,305 

1905 7,483  24,459  34,030  139,000 

Germany. 

1875 ♦6,200  16,430  20,800  167,000 

1885 6,200  22,940  27,600  200,000 

1895 6,200  27,780  46,700  331,000 

1900 6,200  30,750  73,000  487,000 

1905 6,200  33,730  103,400  588,700 

•Although  new  waterways,  with  a  lenpth  of  several  hundred  miles,  have 
been  constructed  since  1875,  other  waterways,  agrgreKatinK  about  the  same 
lenpth,  have  entirely  lost  their  importance  and  are  therefore  e.xcluded,  so 
that  the  total  length  is  accepted  as  unchanged.  If  all  abandoned  or  insig- 
nificant lines  are  included,  the  total  length  of  German  waterways  may  be 
estimated  at  from  7,709  to  8,5(X)  miles. 

186 


RAILWAYS   AND    INLAND   WATERWAYS 

report  of  its  investigation  of  the  waterways  of 
Continental  Europe.  This,  in  conjunction  with  the 
report  on  the  proposed  Lakes-to-the-Gulf  Deep 
Waterway,  issued  a  short  time  before  by  a  board 
of  United  States  army  engineers,  and  other  official 
reports  of  the  United  States  government,*  makes 
possible  a  tolerably  up-to-date  comparison  of  the 
more  important  waterways  of  Europe,  those  of 
France  and  Germany,  with  those  of  the  United 
States. 

The  waterways  of  France,  which  are  consider- 
ably used,  include  about  4,500  miles  of  rivers  and 
3,000  miles  of  canals.  The  maximum  depth  which 
has  been  obtained  on  them  is  8.5  feet,  while  most 
of  the  traffic  is  carried  on  water  varying  in  depth 
from  1.5  to  5  feet.  The  largest  estimate  of  the 
mileage  of  the  waterways  of  Germany  is  8,500 
miles;  the  mileage  on  which  the  traffic  is  consid- 
erable is  6,200.  The  depth  of  the  "free  rivers" 
varies  from  3  or  4  feet  on  those  such  as  the  Oder, 
Elbe,  and  Vistula,  which  have  unstable  beds,  to  5 
or  6  feet  on  those  such  as  the  Rhine  and  Upper 
Main,  which  have  stable  beds;  and  on  the  lower 
sections  of  some  of  the  larger  rivers  the  maximum 

*  "Transportation  by  Water,  1906,"  issued  by  Bureau  of 
the  Census;  "Preliminary  Report  of  the  United  States  Na- 
tional Waterways  Commission;"  "Statistical  Abstract  of 
the  United  States,  1909, ' '  pages  301-322.  '  'Transportation  in 
Europe,"  by  Logan  G.  McPherson  (Henry  Holt  &  Company, 
New  York),  contains  extremely  interesting  and  valuable  in- 
formation about  the  waterways  and  railways  of  Europe. 

187 


THE    AMERICAN    TRANSPORTATION    QUESTION 

depths  are  8  to  10  feet.  The  depths  of  the  canal- 
ized rivers  are  2.6  to  7.5  feet;  and  of  the  canals,  4 
to  10  feet,  the  latter  being  very  rare,  and  4  to  6 
feet  being  most  common. 

Practically  all  of  the  traffic  is  carried  in  shallow 
barges  varying  in  capacity  from  100  to  1,000  tons. 
The  great  bulk  is  handled  in  barges  2  feet  to  6  feet 
deep  and  having  capacities  of  150  to  600  tons, 
which  are  commonly  towed  in  trains  at  from  2h  to 
4  miles  an  hour.  Barges  of  1,000  tons  capacity 
are  confined  almost  exclusively  to  the  Rhine  in 
Germany  and  the  Seine  in  France.' 

The  United  States  government  had  spent,  up  to 
1907,  over  $208,000,000  on  the  improvement  of  the 


*  Regarding  the  operation  of  the  water  craft  in  France, 
L.  G.  McPherson  ("Transportation  in  Europe,"  pages  16- 
17)  says:  "In  exceptional  cases  only  does  the  proprietor  of 
the  merchandise  transported  own  the  craft.  The  industry 
is  still  that  of  the  small  enterprise.  Of  the  boats,  other 
than  steamboats,  two-fifths  both  as  to  number  and  tonnage 
belong  to  boatmen,  each  of  whom  has  only  one  boat  and 
sails  that  boat  himself.  This  proportion,  however,  has 
fallen  ;  10  years  ago  it  was  one-half.  Another  fifth  belongs 
to  boatmen,  each  of  whom  owns  two  or  three  boats  and  al- 
most always  sails  one  of  them  himself.  Really  important 
enterprises,  each  possessing  20  boats  or  more,  scarcely  rep- 
resent more  than  one-tenth  of  the  total  tonnage.  The  boat- 
men live  on  their  boats  with  their,  families.  Thirteen  thou- 
sand three  hundred  boats  are  provided  with  cabins  which 
were  shown  by  the  last  census  to  be  inhabited  by  18,600 
men,  10,800  women  and  16,200  children,  this  floating  popula- 
tion having  no  other  home.  Nearly  3,000  of  the  boats  are 
provided   with   stables   sheltering    their   draught    animal", 

188 


RAILWAYS   AND    INLAND    WATERWAYS 

Mississippi  Valley  waterway  system  alone ;  and  the 
Mississippi  River  now  has  in  its  lower  section  a 
minimum  depth  exceeding  that  of  any  river  in  Eu- 
rope. During  seasons  of  low  water  boats  having 
drafts  of  25  to  30  feet  can  easily  be  taken  from  the 
Gulf  of  Mexico  270  miles  to  New  Orleans,  Baton 
Rouge  and  Bayou  Sara.  Boats  of  a  draft  of  9  feet 
can  always  be  taken  from  these  points  840  miles  to 
Cairo,  Illinois;  boats  of  8  feet  from  Cairo  to  St. 
Louis,  182  miles;  and  boats  of  4J  feet  from  St. 
Louis  via  the  Mississippi  River  and  Illinois  River 
and  the  Illinois  state  canal  to  Chicago,  365  miles. 
There  is  a  channel  of  at  least  44  feet  at  low  water 
(7  feet  during  1907-8)  from  the  mouth  of  the  Illi- 


2,400  horses,  150  mules  and  1,950  donkeys."  In  the  Nether- 
lands, says  the  same  authority  (page  29),  "In  a  large  num- 
ber of  cases  the  boatman  owns  his  boat  and  lives  upon  it 
with  his  family ;  but  there  are  two  companies  which  own 
about  700  craft  each.  About  150  separate  lines  of  small 
steamers  give  regular  service  between  the  numerous  towns. 
Ferry  lines  and  lighters  are  owned  by  the  railroads,  and 
many  of  the  manufacturing  companies  own  and  operate 
craft  engaged  especially  in  their  service."  In  Belgium 
(page  31)  :  "In  nearly  every  case  the  boat  is  navigated  by 
the  owner  and  his  family,  who  live  upon  it.  The  boatmen 
make  somewhat  more  money  than  the  ordinary  workingmen, 
but  never  a  very  high  profit.  These  men  are  helped  by  an 
association,  which  is  permitted  by  law  to  loan  money  on 
mortgages  on  a  boat  after  it  has  been  built.  Because  of  a 
certain  movement  of  traffic  on  the  inland  waterways  be- 
tween France,  Holland  and  Belgium,  there  is  an  agreement 
as  to  the  size  of  the  boats,  in  order  that  those  of  either 
country  may  go  through  the  canals  of  the  others." 

189 


Till';    AMERICAN    TRANSPORTATION    QUESTION 

nois  River  620  miles  up  the  Mississippi  to  St.  Paul, 
Minnesota;  and  a  channel  of  at  least  4i  feet  up  the 
Missouri  River  to  Kansas  City,  and  of  2i  feet  to 
Fort  Benton,  2,285  miles  from  St.  Louis.  At  mean 
stages  of  water  there  is  a  depth  in  the  Ohio  of  9 
feet  from  Cairo,  Illinois,  to  Pittsburgh,  1,000 
miles;  and  the  Monongahela,  a  tributary  of  the 
Ohio,  has  a  depth  of  5  feet  into  the  Pennsylvania 
coal  fields.  The  Kanawha,  another  tributary  of 
the  Ohio,  has  a  depth  of  6  feet  into  the  West  Vir- 
ginia coal  fields.  Other  streams  in  the  Mississippi 
River  system  which  have  channels  as  good  as  those 
of  most  of  the  navigated  rivers  of  Europe  include 
the  Allegheny,  Little  Kanawha,  Muskingum,  Ken- 
tucky, Cumberland,  Tennessee,  St.  Croix,  Minne- 
sota, Osage,  Gasconade,  St.  Francis,  Yazoo,  Ar- 
kansas and  Red.^ 

There  are  295  navigable  streams  and  45  canals 
in  this  country  having  an  aggregate  mileage  of 
28,600  miles;  and  of  these,  40  streams,  with  a 
length  of  2,600  miles,  have  a  depth  of  10  feet;  and 
70,  with  a  depth  of  3,200  miles,  have  a  depth  of  6 
to  10  feet.  -  Over  67  per  cent,  of  the  total  water- 
borne  commerce  of  Germany  is  carried  on  the 
Rhine  and  Elbe,  yet  these  two  rivers  together 

'  Report  of  the  Special  Board  of  Army  Eng'ineers  on  the 
proposed  Lakes-to-the-Gulf  Deep  Waterway,  pape  24. 

-  Part  I  of  the  Report  of  the  Commissioner  of  Corpora- 
tions on  Transportation  by  Water  in  the  United  States, 
pages  28  and  29. 

190 


RAILWAYS   AND    INLAND    WATERWAYS 

have  only  617  miles  of  channel  with  a  depth  of  4| 
feet  or  more,  while  41  feet  is  the  minimum  depth 
on  the  present  waterway  of  1,657  miles  from  Chi- 
cago to  New  Orleans. 

We  must  look  elsewhere  than  to  the  comparative 
conditions  of  the  rivers  and  canals  of  Europe  and 
of  the  United  States  for  an  explanation  of  the  fact 
that  while  on  the  former  commerce  has  grown,  on 
the  latter  it  has  declined.  One  explanation  ad- 
vanced is  that  municipalities  and  private  corpora- 
tions in  Europe  have  provided  excellent  terminal 
facilities  for  boats  at  cities  and  large  towns,  and 
the  concerns  running  water  lines  have  developed 
types  of  towboats  and  barges  which  can  be  ope- 
rated at  the  minimum  cost,  while  in  the  United 
States  there  has  been  almost  no  improvement  in 
river  or  canal  boats  or  terminal  facilities  for  30 
years.  But,  it  is  replied,  the  failure  to  provide 
good  facilities  in  the  United  States  has  perhaps 
been  as  much  an  effect  as  a  cause  of  the  decline  of 
water  traffic;  would  they  not  have  been  provided 
by  private  enterprise  had  there  been  profits  in 
sight  to  justify  it? 

An  important  reason,  undoubtedly,  why  our 
water-borne  traffic  has  not  grown  is  that  our  prin- 
cipal waterway  system,  except  the  Great  Lakes, 
viz.,  the  Mississippi  and  its  tributaries,  is  not  so 
situated  with  reference  to  the  main  currents  of 
commerce  as  to  be  able  to  command  a  large  amount 
of  traffic,  no  matter  what  rates  may  be  made  on  it. 

191 


THK    AMERICAN    TRANSPORTATION    QUfc:STION 

In  order  that  either  a  waterway  or  a  railway  may 
get  traffic  and  actually  cheapen  transportation  by 
carrying  it,  it  is  not  enough  that  it  should  be  will- 
ing and  able  to  make  low  rates.  It  must  also  run 
in  the  same  general  direction  as  currents  of  com- 
merce large  enough  to  afford  it  a  substantial  busi- 
ness. The  general  direction  in  which  commerce 
moves  is  determined  by  the  economic  law  of  sup- 
ply and  demand.  People  ship  goods  to  make  a 
profit;  they  can  only  make  a  profit  by  shipping 
them  from  where  they  are  less  valuable  to  where 
they  are  more  valuable ;  and  where  they  shall  be 
less  valuable  or  more  valuable  is  determined,  since 
the  coming  of  the  railway,  by  conditions  indepen- 
dent of  the  way  in  which  waterways  run.  In  this 
country,  owing  to  historic  and  economic  reasons, 
manufactured  goods  are  shipped  mainly  from  east 
to  west,  and  the  products  of  the  farm,  mine  and 
forest  mainly  from  west  to  east.  The  amount  of 
traffic  which  moves  north  and  south,  although  ab- 
solutely large,  is  relatively  small ;  and  there  seems 
no  ground  for  anticipating  any  substantial  change 
in  this  respect.  As  the  Mississippi  and  its  tribu- 
taries run  mainly  north  and  south,  it  is  hard  to 
see  where  a  heavy  traffic  for  them  could  be  ob- 
tained for  some  years  to  come,  even  though  the 
boats  on  them  were  able  to  compete  successfully  in 
rates  against  the  north-and-south  railways. 

The  situation  of  the  principal  waterways  of  Eu- 
rope relatively  to  the  main  currents  of  commerce 

192 


RAILWAYS   AND    INLAND   WATERWAYS 

is  more  fortunate.  The  Rhine  in  Germany,  for 
example,  like  the  Great  Lakes  in  this  country,  is 
ideally  located  relatively  to  the  sources  of  produc- 
tion and  consumption  of  coal,  iron  ore,  etc.,  to  get 
a  large  traffic  in  them.  In  Europe,  also,  commerce 
grew  up  before  the  advent  of  the  railv^ay,  and  the 
direction  of  the  currents  of  traffic  has  been  influ- 
enced more  by  the  w^ay  the  waterways  run.  Here 
industry  and  the  more  flexible  railway  have  grown 
up  together,  each  determining  where  the  other 
should  go  in  substantial  disregard  of  most  of  the 
waterways.  ^ 

'  The  United  States  National  Waterways  Commission  in 
its  preliminary  report  (pages  30-31)  says:  "The  increase  in 
traffic  on  the  waterways  in  Europe,  in  contrast  with  the  de- 
cline on  the  streams  of  the  United  States,  is  due  in  large 
part  to  the  very  great  difference  between  conditions  in  Eu- 
rope and  those  in  the  United  States."  The  following  is  an 
abstract  of  its  summary  of  these  differences  in  conditions: 

1.  In  1909  the  estimated  population  of  the  United  States 
was  46  inhabitants  per  square  mile,  while  that  of  Germany 
was  290  per  square  mile  ;  that  of  Belgium,  620  ;  and  that  of 
all  Europe,  107.  The  greater  density  of  population  in  Eu- 
rope tends  to  increase  the  quantity  of  freight  in  a  given 
area ;  while  the  railway  mileage  per  square  mile  in  the 
United  States  is  equal  to  or  greater  than  that  in  Europe, 
and  the  mileage  per  1,000  of  population  is  five  times  as 
great. 

2.  In  Europe  the  waterways  were  developed  and  in  very 
general  use  before  the  introduction  of  railways,  and  fac- 
tories and  warehouses  were  located  with  reference  to  them. 
It  is  more  difficult  to  provide  railways  in  Europe  because  of 
the  very  high  costs  of  rights  of  way ;  and  the  opportunity 
for  betterment  by  eliminating  grades  and  curves  is  much 

193 


THE    AMERICAN    TRANSPORTATION    QUESTION 

While  the  fact  that  the  Mississippi  Valley 
waterway  system  runs  transversely  to  the  main 
currents  of  commerce  tends  to  show  why  it  has 
not  developed  a  heavy  commerce,  it  does  not  ex- 
plain why  its  traffic  has  actually  decreased,  while 
that  on  the  competing  north-and-south  railways 
has  grown.  Nor  does  it  explain  why  the  traffic  on 
other  waterways  having  more  favorable  situations, 
such  as  the  Erie  Canal  and  the  Hudson  River, 
has  declined. 

Another  important  reason  why  the  rivers  and 
canals  of  the  United  States  have  been  unable  suc- 
cessfully to  compete  with  the  railways  has  been 
the  comparative  inefficiency  and  inconveniency  of 

less.    The  carrying  capacity  of  the  European  freight  car  is 
but  a  fraction  of  that  of  the  United  States. 

3.  Shifting  of  centers  of  population,  arising  from  the 
development  of  new  coal  mines  and  new  centers  of  manu- 
facturing as  well  as  from  the  growth  of  population,  is  much 
less  common  in  Europe  than  in  the  United  States.  This 
makes  it  possible  to  utilize  an  established  waterway  with 
greater  assurance  of  profit  and  greater  dependence  on  it  as 
a  means  of  transportation. 

4.  One  social  condition  which  the  commission  said  is  en- 
titled to  very  considerable  weight  is  the  existence  in  Europe 
of  the  class  of  boatmen  who  for  generation  after  generation 
apply  themselves  to  the  handling  of  boats  in  river  or  canal 
traffic.  They  live  with  great  economy  on  their  boats  and 
are  contented  with  very  small  gains  and  with  conditions 
which  would  not  be  regarded  favorably  in  the  United  States. 

5.  "Engineering  difficulties,  as  a  rule,  in  those  rivers 
which  are  most  utilized  are  less  serious  on  the  rivers  of  Eu- 
rope than  in  the  United  States.  The  most  notable  example 
of  this  is  the   river  Rhine.     Its  sources  are  in   the  Alps, 

194 


RAILWAYS   AND    INLAND   WATERWAYS 

the  service  rendered  by  the  boats.  The  railways 
have  soliciting  staffs  engaged  constantly  in  beat- 
ing the  entire  country  adjacent  to  their  lines  for 
traffic.  The  larger  systems  have  traffic  represen- 
tatives in  all  the  big  cities,  whether  their  lines 
reach  them  or  not.  If  a  shipper  has  a  consign- 
ment of  freight  to  send  he  can  always  find  a  solici- 
tor of  the  road  over  which  he  wishes  to  route  it — 
if,  indeed,  the  solicitor  does  not  find  him  first. 
When  he  delivers  goods  to  the  railway  it  issues  to 
him  a  merchantable  and  bankable  bill  of  lading 
which  almost  absolutely  protects  him  against  loss 
of  and  damage  to  his  goods.  On  the  other  hand, 
if  a  shipper  desires  to  make  a  shipment  by  even 

where  the  melting  of  snow  and  ice  during  the  hot  weather 
of  summer  furnishes  a  constant  supply  for  the  water  flow  of 
the  river  at  the  very  season  when  rivers  are  likely  to  be 
lowest  in  the  United  States.  Furthermore,  it  should  be  said 
that  conditions  as  regards  alluvial  banks  and  shifting  bars 
due  to  deposits  of  silt,  are  on  the  whole  more  favorable  to 
river  improvement  in  Europe  than  in  the  United  States,  and 
especially  so  upon  rivers  whose  improvement  would  be 
most  useful." 

6.  "Military  conditions  have  been  much  more  regarded 
in  Europe,  not  only  in  the  construction  but  in  the  manage- 
ment of  transportation  lines  than  in  the  United  States. 
Railways  are  laid  down  to  connect  the  center  with  the  fron- 
tier, or,  at  any  rate,  are  located  with  a  view  to  the  mobili- 
zation of  troops  and  to  the  carrying  of  supplies  to  places 
where  they  may  be  needed,  and  with  a  less  uniform  regard' 
for  serving  great  manufacturing  centers  or  populous  cities. 
Waterways  are  located  mainly  with  a  view  to  the  develop- 
ment of  trade  at  all  times  and  to  relieving  the  railroads  in 
time  of  war." 

195 


THE    AMERICAN    TRANSPORTATION    QUESTION 

an  independent  boat  line  on  the  Great  Lakes  he 
has  first  to  hunt  up  a  captain  who  may  have  two 
or  three  boats  available  or  who  may  not.  On  de- 
livering his  goods  he  gets  a  mere  receipt  which 
affords  him  little  or  no  protection  against  loss  and 
damage.  The  inconveniencor,  and  hazards  of  ship- 
ment by  river  or  canal  are  similar  to,  but  much 
greater  than,  those  of  shipment  by  independent 
lake  boat  lines.  The  result  of  these  conditions  on 
the  Lakes  has  been  that  while  the  total  traffic  has 
increased,  the  amount  of  it  handled  by  indepen- 
dent boat  lines  has  remained  stationary  or  de- 
clined.^ Of  course,  conditions  such  as  these  have 
put  the  river  and  canal  lines  at  still  greater  dis- 
advantages than  the  lake  lines  in  competing  with 
the  railways. 

Undoubtedly  the  main  reason  why  the  water- 
borne  traffic  of  the  United  States  has  decreased 
while  that  of  Europe  has  increased  is  the  wide 

'  The  total  shipments  on  the  Lakes  in  1906  (Census  report 
on  Transportation  by  Water,  1906,  pag-e  34),  excluding-  bunker 
coal,  were  about  75,000,000  tons.  Of  this  about  41,000,000 
tons  were  iron  ore  or  its  products  belonging  to.  and  carried 
in  vessels  owned  by,  the  large  steel  corporations.  Very 
much  the  greater  part  of  the  rest  of  the  traffic  was  carried 
in  vessels  belonging  to  railways,  and  to  coal  companies,  lum- 
ber companies,  oil  companies,  etc.,  which  also  owned  the 
cargoes.  Practically  all  of  the  shipments  of  package  freight 
are  carried  by  railway  boat  lines.  The  lake  lines  operated 
by  the  large  industrial  corporations  are  not  common  car- 
riers ;  they  do  not  hold  themselves  out  to  serve  the  public. 
It  is  estimated  that  not  to  exceed  20  per  cent,  of  the  freight 

196 


RAILWAYS   AND    INLAND    WATERWAYS 

difference  between  railway  freight  rates  here  and 
abroad.  The  average  railway  rate  per  ton  per 
mile  in  Belgium  is  almost  15  mills;  in  France,  12.8 
mills;  and  in  Germany,  12.7  mills.  In  the  United 
States  it  is  7.53  mills,  or  50  per  cent,  of  what  it  is 
in  Belgium,  59  per  cent,  of  what  it  is  in  France, 
and  60  per  cent,  of  what  it  is  in  Germany.  Mere 
averages  which  take  no  account  of  differences  in 
conditions  and  methods  of  transportation  may  mis- 
lead, but,  allowing  for  all  such  differences,  it  is 
quite  safe  to  say  that  railway  freight  rates  here 
are  lower  than  in  Europe,  especially  for  long  hauls 
and  for  cheaper  and  bulkier  commodities.  In  fact, 
the  rates  of  American  railways  compare  favorably 
with  those  of  European  waterways.  On  the  Rhine 
in  France  the  rates  vary  from  7  mills  to  14  mills 
per  ton  per  mile;  on  the  Seine,  from  2.3  mills  to 
5  mills;  on  the  Canals  du  Centre  and  du  Midi 
from  5.5  to  7  mills;  on  the  canals  in  the  north- 
transported  on  the  Lakes  is  carried  by  common  carriers,  of 
which  a  large  majority  are  railway  boat  lines.  The  rail- 
ways, and  even  large  industrial  corporations,  sometimes 
have  been  criticised  for  having  got  control  of  so  many  of  the 
lake  steamship  lines.  But  it  is  doubtful  whether,  if  all  the 
lake  steamship  lines  were  operated  by  independent  compan- 
ies, the  traffic  would  be  as  large  as  it  is.  The  traffic  of  the 
large  industrial  corporations  cannot,  of  course,  be  attracted 
from  lines  owned  by  them ;  and  the  railway  boat  lines  get 
a  good  deal  of  business  that  independent  boat  lines  would 
not  get  because  their  traffic  is  solicited  for  them  in  the 
same  way  that  it  is  for  the  railways,  and  often  by  the  same 
staffs. 

14  197 


TlIK    AMERICAN    TRANSPORTATION    QUESTION 

east  and  east  of  France  from  3.4  to  4.1  mills.  The 
average  rate  on  a  wide  variety  of  commodities 
moving-  to  Paris,  where  the  traffic  is  very  dense, 
is  5.17  mills.' 

The  average  rates  per  ton  per  mile  on  the  water- 
ways of  Europe  have  never  been  officially  ascer- 
tained; but  from  a  careful  study  of  the  figures 
given  by  the  British  Royal  Commission  I  think  it 
is  safe  to  conclude  that  the  average  rate  on  all  the 
waterways  of  France  is  certainly  not  less  than  6 
mills;  on  the  waterways  of  Germany,  about  5 
mills;  and  on  those  of  Belgium  about  6.5  mills. 

Before  these  rates  can  fairly  be  compared  with 
those  of  railways  several  facts  must  be  considered. 
A  waterway  usually  is  longer  between  any  two 
points  than  a  railway.  This  makes  its  rates  seem 
lower  than  they  are.  If  the  distance  by  rail  be- 
tween two  points  is  100  miles  and  by  water  150 
miles,  and  the  rate  by  both  rail  and  water  is  $1 
per  ton,  the  average  per  mile  by  rail  will  be  10 
mills,  and  by  water  only  6.6  mills;  but  the  greater 
distance  which  makes  the  waterway's  average 
rate  per  mile  lower  will  also  hinder  the  waterway 
from  getting  traffic.  Now,  the  distances  on  which 
these  average  rates  for  the  waterways  of  Belgium, 
Germany  and  France  are  computed  are  at  least 
one-third  greater  than  the  distances  by  rail.  Com- 
puted on  the  distance  by  rail,  the  average  rate  by 


'  These  rates  are  all  reduced  to  the  basis  of  the  short  ton 
of  2.000  pounds. 

198 


RAILWAYS   AND    INLAND    WATERWAYS 

water  in  Belgium  and  France  would  be  about  8 
mills  and  in  Germany  about  6.5  mills. 

Furthermore,  the  average  railway  rate  for  an 
entire  country  includes  the  comparatively  high 
rates  on  many  high  grade  commodities  which  sel- 
dom can  move  by  water  and  the  rates  on  many 
roads  running  through  mountainous  territory 
where  operating  expenses  are  greater  and  rates 
are  apt  to  be  more  than  on  the  low  grade  railways 
with  which  waterways  mainly  compete.  While 
the  average  railway  rate  per  ton  mile  in  the  United 
States  is  (1910)  7.53  mills,  the  averages  are  much 
lower  on  many  American  roads  having  low  grades 
or  handling  traffic  consisting  largely  or  mainly  of 
cheap  and  bulky  commodities.  For  example,  the 
average  rate  per  ton  per  mile  of  the  New  York 
Central  in  1909  was  6,2  mills;  of  the  Erie,  6.1 
mills;  of  the  Pennsylvania  Railroad,  5.67  mills;  of 
the  Illinois  Central,  5.96  mills;  of  the  Lake  Shore 
&  Michigan  Southern,  5.21  mills;  of  the  Big  Four, 
5.56  mills;  of  the  Norfolk  &  Western,  4.6  mills; 
and  of  the  Chesapeake  &  Ohio,  4.1  mills. 

It  would  seem  from  the  foregoing  that  the  cost 
of  water  transportation  in  Germany  and  France  to 
the  shipper  is  on  the  average  no  less  than  on 
American  railways. '    The  total  cost  is  substantially 

'  The  United  States  National  Waterways  Commission 
says  in  its  preliminary  report:  "The  average  European 
freight  rates  on  railways  paralleling  water  routes  are  higher 
than  those  on  lines  similarly  situated  in  the  United  States, 

1 99 


TIIF.    AMERICAN    TRANSPORTATION    QUESTION 

greater  than  the  cost  to  the  shipper.  The  expend- 
itures of  the  French  government  for  maintenance 
of  canals  and  improved  rivers  and  for  interest  on 
the  money  laid  out  in  their  development  amounts 
to  3.6  mills  per  ton  per  mile  for  all  w^ater-bornc 
traffic/  The  similar  expenditures  of  Belgium  are 
4.1  mills;  and  those  of  Germany,  seven  and  six- 
tenths  of  a  mill  per  ton  per  mile,  including  the 
Rhine  and  the  Elbe  on  which  the  traffic  is  very 
large;  excluding  them,  1.8  mills  per  ton  per  mile. 
This  makes  the  total  average  cost  of  water  trans- 
portation in  PYance,  estimated  according  to  water- 
way mileage,  9.6  mills  per  ton  per  mile;  and,  esti- 
mated according  to  railway  mileage,  11.6  mills.    It 


and  European  rates  for  water-borne  carriage,  in  some  in- 
stances, even  where  the  traffic  is  very  large,  are  as  high  or 
higher  than  on  railways  in  the  United  States  where  traffic 
is  likewise  large. " 

'  In  spite  of  the  comparatively  shallow  depths  that  have 
been  secured  the  expenditures  on  European  waterways  have 
been  very  large.  The  expenditures  of  France  on  its  navig- 
able rivers  have  averaged  $30,000  a  mile,  and  on  its  canals 
$102,675  a  mile.  Germany  has  spent  on  its  navigable  rivers 
an  average  of  $30,300  a  mile,  and  on  its  canals  an  average 
of  $42,250. 

Where  unusual  engineering  difficulties  have  been  encoun- 
tered, or  considerable  depths  have  been  obtained,  the  cost 
per  mile  of  building  canals  or  canalizing  rivers  abroad  has 
greatly  exceeded  the  figures  given.  The  expenditures  on 
the  river  Rhine  have  been  $61,600  a  mile.  The  canalization 
of  the  Main  in  Germany,  a  distance  of  22  miles,  cost  $95,000 
a  mile;  the  building  of  the  Teltow  Canal,  $390,000  a  mile. 
"The  new  works  on  the  Seine"  (in  France),  says  the  Brit- 

200 


RAILWAYS   AND    INLAND    WATERWAYS 

makes  the  total  average  cost  of  water  transporta- 
tion in  Germany,  estimated  according  to  waterway 
mileage,  very  close  to  6  mills ;  and,  estimated  ac- 
cording to  railway  mileage,  not  less  than  7.5  mills. 
It  makes  the  total  average  cost  in  Belgium,  based 
on  waterway  mileage,  10.6  mills;  on  railway  mile- 
age, 12.6  mills.  In  Germany  it  just  about  equals, 
and  in  France  and  Belgium  very  greatly  exceeds 
the  average  cost  of  rail  transportation  in  the 
United  States. 

It  is  not  possible  to  estimate  what  is  the  average 
rate  per  ton  per  mile  on  the  rivers  and  canals  of 
the  United  States.  A  careful  computation'  indi- 
cates that  the  cost  of  transportation  per  ton  per 

ish  Royal  Commission,  "cost  $90,500  a  mile;  but  existing 
works  were  partly  utilized,  so  that  the  entire  cost  would 
have  been  somewhat  higher.  The  cost  of  the  further  canal- 
ized rivers  varies  in  round  figures  between  $27,350  for 
smaller  rivers  and  $83,500  for  those  with  less  favorable 
conditions." 

The  Kaiser  Wilhelm  Canal,  61  miles  long  and  29J  feet 
deep,  cost  $656,000  a  mile.  The  Manchester  Ship  Canal,  35^ 
miles  long  and  26  feet  deep,  cost  $2,113,000  a  mile.  The 
Suez  Canal,  90  miles  long  and  31  feet  deep,  cost  $1,100,000  a 
mile.  Our  own  canal  at  Sault  Ste.  Marie,  2.7  miles  long 
and  25  feet  deep,  has  cost  $4,800,000  a  mile.  Some  persons 
advocate  converting  the  Mississippi  and  connecting  water- 
ways into  a  ship  canal  from  Chicago  to  the  Gulf  of  Mexico, 
a  distance  of  1,657  miles.  The  figures  given  show  that  the 
longer  it  is  necessary  to  make  a  ship  canal  the  more  dubious 
becomes  the  expediency  of  building  it. 

'  Bulletin  No.  21,  Bureau  of  Railway  Economics,  Wash- 
ington, D.  C. 

201 


THE    AMERICAN    TRANSPORTATION    QUESTION 

mile  on  the  Erie  Canal  in  1909  was:  interest  on 
capital,  5.06  mills;  cost  of  maintenance,  1.55  mills; 
rate  paid  by  shipper,  2  mills;  total  cost  per  ton 
per  mile,  8.61  mills.  This  compares  with  the  fol- 
lowing average  rates  per  ton  per  mile  on  compet- 
ing railways:  New  York  Central,  6.2  mills;  Erie, 
6.1  mills;  Lackawanna,  7.4  mills;  Lehigh  Valley, 
6.4  mills. 

Computed  at  34  per  cent.,  the  interest  alone,  on 
each  ton  of  freight  hauled  one  mile  in  the  Sault 
Stc.  Marie  Canal  in  1910,  was  2.7  mills;  and  in  1908, 
when  the  traffic  was  smaller,  it  was  over  4  mills.' 
This  does  not,  of  course,  indicate  that  construc- 
tion of  the  canal  was  unwise,  for  it  serves  to 
cheapen  transportation  on  all  the  Great  Lakes, 
which  were  provided  by  nature;  but  it  may  throw 
light  on  what  would  be  the  economic  cost  of  trans- 
portation on  longer  ship  canals  which  might  be 
built,  not  to  connect  and  make  more  serviceable 
such  great  already  existing  waterways,  but  to 
serve  as  independent  transportation  facilities. 

Transportation  by  rail  is  faster  and  better  than 
by  water.  The  freight  car  can  move  as  well  into 
a  shipper's  warehouse  to  get  goods  as  on  the  road's 
main  line,  while  all  goods  shipped  by  water  must 
in  some  way  be  hauled  to  and  from  the  water's 
side  and  be  transferred  to  and  from  the  boat. 
Therefore,  to  compete  successfully  with  railways, 


'  Railway  Age  Gazette,  August  11,  1911. 
202 


RAILWAYS   AND    INLAND    WATERWAYS 

boats  must  make  rates  to  shippers  not  only  as  low 
as,  but  lower  than  those  of  railways.  Experience 
in  Europe  and  the  United  States  shows  that  they 
must  ordinarily  be  20  to  50  per  cent,  lower.  The 
conclusion  is  inevitable  that  if  our  waterways  and 
their  equipment  were  in  the  exact  condition  of 
those  of  France  and  Germany,  and  made  equally 
low  rates,  they  would  fail  as  utterly  in  the  future 
to  compete  successfully  with  the  railways  as  they 
have  heretofore. 

Some  of  the  advocates  of  further  development 
of  waterways  apparently  see  this  fact.  They 
therefore  favor  the  proposed  Lakes-to-the-Gulf 
waterway  and  other  waterways  being  dug  14  feet 
deep  or  even  20  feet  or  more ;  and  they  paint  at- 
tractive pictures  of  great  vessels  loading  at  Chi- 
cago and  St.  Louis,  and  steaming  without  transfer 
of  goods  through  the  country  to  the  Gulf,  and 
thence  to  all  the  ports  of  the  world.  But  if  the 
waterway  were  deepened  to  only  14  feet  hardly 
any  boats  could  use  it  w^hich  cannot  use  it  now, 
for  over  95  per  cent,  of  the  vessel  tonnage  on  the 
Great  Lakes  draws  over  14  feet  of  water,  and  more 
than  80  per  cent,  draws  over  19  feet;  and,  of 
course,  seagoing  vessels  cannot  navigate  where 
lake  vessels  cannot.  Even  if  the  Lakes-to-the- 
Gulf  waterway  were  dug  20  feet,  or  even  30  feet, 
it  is  not  probable  it  would  be  used  by  lake  or  ocean 
steamships.  The  average  cost  of  an  ocean  steam- 
ship per  ton  of  capacity  is  $71;  of  a  lake  steam- 

203 


TIIH    AMERICAN    TRANSPORTATION    QUESTION 

ship,  $41,50;  and  of  a  river  towboat  and  barges 
capable  of  carrying-  10,000  tons  of  freight  on  an 
8i  foot  draft,  only  $12/  Moreover  a  lake  or  ocean 
vessel  is  poorly  constructed  for  navigating  a  canal 
or  tortuous  river  with  a  swift  current;  its  ratio  of 
length  to  beam  is  too  great  and  its  rudder  power 
insufficient  to  keep  it  from  frequently  running  into 
the  banks,  except  when  moving  very  slowly.  Col- 
onel Thomas  W.  Symons,  of  the  corps  of  engineers 
of  the  United  States  army,  in  a  report  in  1897  on 
the  proposed  deepening  of  the  Erie  Canal,  esti- 
mated that  the  cost  to  the  shipper  of  transporting 
wheat  in  a  lake  freighter  of  7,000  tons  capacity 
through  a  ship  canal  would  be  38  per  cent,  greater 
than  with  a  towboat  and  barges  on  a  barge  canal." 

'  Report  of  Board  of  Army  Engineers  on  Proposed  Lakes- 
to-the-Gulf  Deep  Waterway,  page  24. 

-  If  the  proposed  development  of  waterways  wou4d  reduce 
what  I  have  called  the  "total"  cost  of  transportation,  it  is 
quite  obvious  that  it  would  be  practicable  for  boat  owners 
to  make  rates  which  would  be  high  enough  to  cover  a  return 
on  the  government's  expenditures,  and  yet  low  enough  to 
attract  traffic  from  the  railways.  When  the  United  States 
reclamation  service  builds  an  irrigation  ditch,  it  requires 
those  whose  lands  are  watered  to  pay  for  the  water ;  and 
there  is  no  more  reason  why  the  government  should  provide 
facilities  ot  transportation  for  boat  owners  or  shippers  for 
nothing  than  why  it  should  provide  irrigation  for  farmers 
for  nothing.  In  some  cases  governments  have  levied  tolls 
on  canals  and  improved  rivers ;  but  in  no  case  since  the 
advent  of  the  railway  has  it  been  possible  to  get  in  this 
way  enough  revenue  to  pay  interest  and  maintenance 
charges. 

204 


RAILWAYS   AND   INLAND   WATERWAYS 

This  took  no  account  of  the  fact  that  the  esti- 
mated cost  to  the  public  of  building  the  ship  canal 
would  be  four  times  greater  than  of  building  the 
barge  canal.  The  Mississippi  waterway  system 
and  many  other  of  our  rivers  and  canals  could  be 
used  as  well  now  by  boats  such  as  those  oh  the 
waterways  of  Europe  as  if  it  were  much  deeper; 
and  if  they  were  much  deeper  they  could  not  and 
would  not  be  used  by  either  lake  or  ocean  vessels. 


CHAPTER  X 

INLAND   WATERWAYS   AS   REGULATORS   OF 
RAILWAY   RATES 

The  second  argument  for  waterway  develop- 
ment to  which  I  have  alluded  is,  that  it  would  reg- 
ulate freight  rates.  By  this  is  meant,  of  course, 
that  it  would  reduce  the  rates  of  competing  rail- 
ways. Railway  rates  in  all  parts  of  the  United 
States  always  have  been,  and  are  now,  consider- 
ably affected  by  the  competition  not  only  of  the 
coastwise  and  Great  Lakes  routes,  but  also  of  riv- 
ers and  canals.  Along  the  Mississippi  River,  all 
the  way  from  New  Orleans  to  St.  Paul,  they  are 
lower  than  they  would  be  if  uninfluenced  by  the 
river's  presence.  The  rates  between  Buffalo  and 
New  York  always  have  been  considerably  affected 
by  competition  via  the  Erie  Canal  and  the  Hudson 
River.  Between  innumerable  other  points,  partic- 
ularly in  the  Southeast,  railway  rates  are  influ- 
enced by  minor  streams  which  parallel  the  rail- 
ways. 

It  is  possible  that  by  adopting  a  comprehensive 
and  efficient  policy  of  waterway  development  the 
public  could  considerably  increase  the  number  of 
places  where  water  competition  would  reduce  rail- 

206 


WATERWAYS   AS    REGULATORS   OF    RATES 

way  rates.'  It  would  not  be  sufficient,  in  order  to 
make  rivers  and  canals  more  effective  competitors 
of  the  railways,  for  the  government  to  provide  the 
necessary  channels.  To  a  railway  good  and  ade- 
quate terminals  are  as  essential  to  economical  and 
satisfactory  operation  as  good  roadway.  Likewise, 
to  water  routes,  good  and  adequate  terminals  are 
as  essential  as  good  channels.  Before  the  channels 
the  government  provided  could  be  utilized  to  any 
purpose  it  would  be  necessary  for  the  various  mu- 
nicipalities on  the  waterways  to  either  provide 
good  water  terminals  or  give  private  capital  the 
opportunity  and  incentive  to  do  so.  Many  of  the 
municipalities  of  Europe  have  themselves  provided 
water  terminals,  and  allow  all  carriers  to  use  them 
on  equal  terms.  Finally,  after  the  government 
had  provided  the  channels  and  the  municipalities 
had  provided,  or  caused  to  be  provided,  the  termi- 
nals, it  would  be  necessary  for  those  running  the 
boat  lines  to  furnish  better  boats  and  to  form  bet- 
ter organizations  for  soliciting  and  handling  the 

'  The  most  efficient  policy  would  by  no  means  involve  the 
digging  of  deep  channels,  for,  as  has  already  been  indicated, 
a  towboat  and  barges  having  a  capacity  of  eight  or  ten 
thousand  tons  can  be  built  for  less  than  one-third  as  much  as 
a  lake  freighter  having  a  similar  capacity,  and  can  be  op- 
erated much  more  cheaply  on  a  river  or  canal  with  a  depth 
of  from  six  to  nine  feet  than  a  lake  freighter  could  be  on  a 
river  or  canal  having  a  depth  of  even  twenty  feet.  To  build 
canals  of  much  length  or  to  canalize  rivers  to  more  than 
nine  feet  deep  would  be  sheer  waste  from  any  standpoint. 

207 


THE    AMERICAN    TRANSPORTATION    QUESTION 

business  than  have  ever  been  known  on  any  of  our 
inland  waterways,  excepting  the  Great  Lakes. 

Many  of  the  rates  heretofore  made  by  the  rail- 
ways to  points  of  water  competition  have  been  de- 
signed not  merely  to  meet  this  competition  and 
secure  a  division  of  the  traffic,  but  have  been  war 
measures  intended  to  destroy  competition,  and 
have  produced  the  intended  result.  Sometimes 
they  have  been  less  than  the  cost  of  the  service. 
In  numerous  cases  after  the  water  competition 
has  been  destroyed,  the  railway  rates  have  been 
raised.  For  the  protection  of  the  waterways  from 
this  extreme  form  of  competition  the  Mann-Elkins 
act,  passed  in  1910,  put  into  Section  four  of  the  In- 
terstate Commerce  Law  a  new  provision.  This  is 
as  follows : 

Whenever  a  carrier  by  railroad  shall  in  competition 
with  a  water  route  or  routes  reduce  the  rates  on  the 
carriage  of  any  species  of  freight  to  or  from  competi- 
tive points,  it  shall  not  be  permitted  to  increase  such 
rates  unless  after  hearing  by  the  Interstate  Commerce 
Commission  it  shall  be  found  that  such  proposed  in- 
crease rests  upon  changed  conditions  other  than  the 
elimination  of  water  competition. 

This  legislation  will  restrain  the  railways  in  fu- 
ture from  making  any  rates  to  meet  water  compe- 
tition which  will  not  in  the  opinion  of  their  traffic 
managers  be  permanently  remunerative,  and  will 
in  a  good  many  cases  protect  the  waterways  from 

208 


WATERWAYS   AS    REGULATORS   OF   RATES 

such  ruthless  competition  as  they  at  times  have 
encountered  in  the  past. 

But,  while  waterway  development  might  affect 
railway  rates  at  a  good  many  points,  it  seems 
highly  questionable  if  its  results  in  this  respect 
would  be  as  great  as  its  advocates  believe.  Water- 
ways cannot  compete  with  railways  for  traffic  in  the 
more  valuable  commodities.  The  railway  rate  is 
so  small  compared  with  their  value  and  the  impor- 
tance of  speed  in  their  transportation  that  no  rate 
which  the  water  lines  with  their  slower  service 
could  make  would  attract  them  from  the  railways. 
To  compete  effectively  with  the  railways  for  the 
cheaper  and  bulkier  traffic  our  rivers  and  canals 
would  have  to  make  lower  rates  than  have  ever 
been  made  by  such  waterways  in  any  country  in 
the  world.  For  it  is  precisely  in  the  cheapness 
with  which  they  can  transport  these  commodities 
that  our  railways  excel  all  others.  In  Europe 
freight  cars  have  a  capacity  of  only  10  to  15  tons. 
In  the  United  States  their  average  capacity  is  35 
tons.  The  difference  in  locomotive  tractive  power 
is  in  proportion.  Owing  to  these  and  other  condi- 
tions the  railways  of  the  United  States  can  haul 
very  much  larger  car  loads  and  train  loads  of  bulky 
commodities  moving  in  large  quantities  than  those 
of  Europe;  and  this  reduces  the  cost  of  hauling 
each  unit  of  traffic  to  a  minimum.  The  average 
train  load  in  England  may  not  exceed  100  tons; 
in  France  it  is  177  tons;  in  Prussia-Hesse  it  is 

209 


THE    AMERICAN    TRANSPORTATION    QUESTION 

233  tons;  in  the  United  States  it  is  363  tons; 
and  the  train  loads  in  which  the  bulimy  com- 
modities such  as  coal,  ore  and  lumber — are 
handled  in  this  country  far  exceed  this  average. 
Trains  transporting  3,000  tons  of  coal  are  not 
uncommon;  and  occasionally  trainloads  of  more 
than  5,000  tons  are  hauled.  The  Virginian  rail- 
way in  1909  with  a  Mallet  engine  ran  a  train 
composed  of  120  steel  coaches,  which  was  a 
mile  and  six  feet  long  and  which  transported  6,000 
tons,  or  12,000,000  pounds,  of  coal.  In  order 
that  boats  may  handle  traffic  most  economically  it 
is  necessary  that  they  shall  handle  it  in  large 
quantities.  In  order  that  they  may  do  this  it  is 
necessary  to  accumulate  it  until  the  maximum 
cargo  is  secured.  If  railways  are  given  a  chance 
to  handle  bulky  commodities  in  the  same  way,  it  is 
not  improbable  that  with  low  grades  and  large 
modern  engines  they  can  transport  them  at  as  low 
operating  costs  as  even  lake  or  ocean  steamships. 
The  average  operating  expenses  per  train  mile  on 
the  railways  of  the  United  States  in  1909  was 
$1.43.  Suppose  it  cost  the  Virginian  railway  three 
times  this,  or  $4.29  a  train  mile  to  haul  the  6,000 
tons  referred  to;  the  cost  per  ton  per  mile,  then — 
including  transportation  and  maintenance  ex- 
penses, but  allowing  nothing  for  fixed  charges — 
was  but  iVd  of  one  mill!  Of  course,  this  is  an  ex- 
treme illustration.  I  have  given  it  merely  to  show 
how  cheaply  low  grade  commodities  can  be  trans- 

210 


WATERWAYS   AS    REGULATORS    OF   RATES 

ported  by  railways  under  conditions  similar  to 
those  under  which  large  lake  freighters  or  steam- 
boats drawing  barges  handle  them. 

On  the  whole  it  seems  improbable  that  boats  on 
most  of  our  inland  waterways  would  be  able  to 
make  rates  which  would  enable  them  to  compete 
effectively  against  the  railways,  if  no  restrictions 
were  put  on  the  competitive  action  of  the  roads 
except  those  designed  to  prevent  them  from  tak- 
ing traffic  away  from  the  waterways  by  making 
rates  which  would  be  unremunerative — which,  in 
other  words,  would  add  less  to  their  earnings  than 
the  handling  of  the  traffic  thus  secured  would  add 
to  their  operating  expenses,  A  railway  ought  not 
to  be  p3rmittedto  make  such  unremunerative  rates 
to  meet  water  competition;  or,  indeed,  for  any 
other  purpose;  for  when  this  is  done  the  road 
must,  if  it  is  to  earn  a  fair  return,  make  good 
what  it  loses  on  the  competitive  traffic  by  impos- 
ing unnecessarily  high  rates  on  other  traffic.  A 
railway  ought  not  to  be  allowed  to  get,  by  impos- 
ing unnecessarily  high  rates  on  some  of  its  patrons, 
the  means  for  destroying  water  transportation  en- 
joyed by  other  patrons. 

If  the  railways  are  not  allowed  in  the  future  as 
in  the  past,  within  the  limitation  just  indicated, 
freely  to  reduce  their  rates  to  meet  water  competi- 
tion the  waterways  will  not  regulate  railway  rates ; ' 

'  The  governments  of  Continental  Europe  have  firmly  re- 
strained the  railways  from  competing  effectively  with  the 

211 


THE    AMERICAN    TRANSPORTATION    QUESTION 

and  if  the  public  desires  the  waterways  to  regu- 
late railway  rates  it  will  have  to  let  the  railways 
reduce  their  rates  to  meet  the  rates  of  the  water- 
ways and  take  the  risk  that  they  will  thus  attract 
business  from  the  waterways. 

This  latter  policy  would  aggravate  the  discrim- 
inations in  railway  freight  rates  to  different  com- 
munities about  which  there  is  now  so  much  com- 
plaint. For  the  main  cause  of  these  discriminations 
is  that  where  the  railways  encounter  effective  water 
competition  they  make  lower  rates  than  they  make 
elsewhere.  With  every  increase  of  water  compe- 
tition there  would  be  an  increase  of  discrimination. 
All  the  people  of  the  country  would  be  taxed  to 
pay  for  the  development  and  maintenance  of  the 

waterways,  and  this  has  been  one  of  the  reasons  why  water- 
borne  traffic  has  increased  faster  there  than  here.  The 
United  States  National  Waterways  Commission  says  (Pre- 
liminary Report,  pajje  31) :  "Sedulous  care  is  taken  by  most 
European  countries  for  the  protection  of  water-borne  traffic 
against  railway  competition.  In  France  this  is  accomplished 
by  forcing  a  differential  of  20  per  cent,  in  favor  of  the 
waterways  as  against  the  railways"  (i.e.,  the  railways  are 
required  in  all  cases  to  make  their  rates  at  least  20  per  cent, 
higher  than  those  of  the  competing  lines),  '  'with  the  evident 
intention  of  maintaining  both  methods  of  transportation.  In 
a  majority  of  other  countries  in  which  water  transportation 
has  reached  its  highest  development  the  railways,  wholly  or 
partially,  belong  to  the  state.  This  is  true  in  Germany, 
Austria,  Hungary,  Holland  and  Belgium.  The  well-estab- 
lished policy  in  these  countries  is  to  secure  cooperation  be- 
tween the  railways  and  waterways  by  official  control  of  rail- 
way rates  with  a  view  to  maintaining  profitable  traffic  on 
the  latter." 

212 


WATERWAYS   AS   REGULATORS   OF   RATES 

waterways;  but  only  those  adjacent  to  the  water- 
ways would  get  the  benefit  of  any  resulting  reduc- 
tions in  railway  rates.  The  communities  not  on 
the  waterways  would  actually  be  injured.  It  is 
the  relation  between  rates  that  mainly  counts ;  and 
a  community  may  be  as  much  harmed  by  reduc- 
tions in  the  rates  of  a  rival  community  as  by 
advances  in  its  own. 

It  is  sometimes  said  that  such  discriminations 
in  rates  could  and  should  be  prevented  by  passing 
a  law  requiring  railways  to  make  rates  as  low  in 
proportion  where  they  do  not  encounter  water 
competition  as  where  they  do.  But  the  railways 
cannot  afford  to  reduce  all  their  rates  to  the  level 
of  those  made  to  meet  water  competition  any  more 
than  the  manufacturer  or  merchant  could  afford  to 
reduce  all  his  prices  to  the  basis  of  those  made  to 
get  rid  of  surplus  and  otherwise  unsalable  goods. 
The  effect  of  such  legislation  would  be  to  force 
the  roads  in  many  cases  to  quit  making  rates  to 
meet  water  competition.  This  would  not  benefit 
places  without  water  transportation ;  for  the  com- 
munities having  water  transportation  would  still 
enjoy  the  low  water  rates.  It  might  actually  in- 
jure communities  without  water  transportation. 
For  the  law  will  not  permit  the  railway  to  be  de- 
nied a  "fair  return,"  If  it  quit  meeting  the 
water  rates  it  would  lose  whatever  traflfic  it  had 
got  to  points  having  v/ater  transportation;  and  if 
this  reduced  its  aggregate  profits  below  a  "fair 
15  213 


THE    AMERICAN    TRANSPORTATION    QUESTION 

return,"  it  legally  could  make  up  the  deficit  by  ad- 
vances in  rates  to  communities  without  water 
transportation.  These  communities  would  then 
have  paid  taxes  to  secure  for  rival  communities 
low  water  rates  and  for  themselves  the  privilege 
of  paying  higher  railway  rates. 

Up  to  this  time  in  the  discussion  of  regulation 
of  railway  rates  by  waterways  I  have  dealt  only 
with  the  question  whether  the  proposed  develop- 
ment of  waterways  would  reduce  the  cost  of  trans- 
portation to  the  shipper.  But,  as  I  have  already 
said,  the  important  question  for  the  public  is 
whether  it  would  reduce  the  total  economic  cost  of 
transportation,  including  the  rates  the  shippers 
would  have  to  pay  to  the  owners  of  the  boats,  and 
the  taxes  that  the  public  would  have  to  pay  for 
the  development  and  maintenance  of  the  water- 
ways. It  being  doubtful  whether  the  proposed 
waterway  development  would  reduce  the  cost  of 
transportation  to  the  shipper,  it  is,  of  course,  very 
much  more  doubtful  whether  it  would  reduce  the 
total  economic  cost.  It  can  be  said  without  any 
hesitation  that  in  all  the  discussions  of  the  devel- 
opment of  waterways  no  evidence  whatever  has 
been  adduced  that  the  building  of  canals  and  the 
canalizing  of  rivers  would  reduce  the  economic 
cost  of  transportation  in  the  United  States.  All 
the  data  bearing  on  the  subject  that  I  have  been 
able  to  find  has  tended  to  lead  me  to  the  opposite 
conclusion. 

214 


WATERWAYS   AS    REGULATORS    OF   RATES 

Despite  this,  if  the  development  of  waterways 
was  the  only  means  available  for  the  regulation  of 
railway  rates  one  might  be  disposed  to  favor  it. 
But  we  have  43  state  commissions  and  an  Inter- 
state Commerce  Commission  charged  with  the 
duty  of  making  railway  rates  reasonable,  and  a 
Commerce  Court  created  especially  to  hear  appeals 
from  decisions  of  the  Interstate  Commerce  Com- 
mission. If  the  commissions  do  their  duty  they 
will  keep  railway  rates  reasonably  low.  If  water- 
way development  should  then  further  regulate 
them,  its  effect  would  make  them  unreasonably 
low,  at  least  at  competitive  points. 

If  waterway  development  reduced  the  cost  of 
transportation  to  the  shipper  without  reducing  the 
total  economic  cost  of  transportation,  and  at  the 
same  time  pulled  down  railway  rates  unduly,  it 
would  take  money  out  of  the  pockets  of  the  public 
and  the  pockets  of  the  railways  in  order  to  put 
less  than  the  combined  sums  taken  from  them  into 
the  pockets  of  the  shippers. 

The  third  argument  in  favor  of  further  develop- 
ment of  waterways  which  I  have  mentioned  is  that 
it  would  provide  in  the  best  way  needed  additional 
facilities  of  transportation.  That  rapid  expansion 
of  such  facilities  is  needed  is  not  ^questionable. 
Every  fall  and  winter  for  some  years  before  the 
panic  of  1907  the  country  suffered  from  what  were 
called  ' '  shortages  of  cars, ' '  but  what  were  really 
shortages  of  railway  facilities  in  general.     Owing 

215 


THE    AMERICAN    TRANSPORTATION    QUESTION 

to  large  increases  of  facilities  and  improvements 
in  methods  of  operation  the  railways  have  since 
handled  the  heaviest  traffic  in  their  history,  that 
of  1910,  without  serious  general  congestion  or  de- 
lays. But  commerce  soon  will  be  growing  rapidly 
again;  and  unless  means  of  transportation  are  in- 
creased proportionately  periods  of  "car  shortage" 
will  recur. 

The  object  of  public  policy  should  be  to  cause 
such  additional  facilities  to  be  provided,  whether 
by  the  expenditure  of  public  or  private  capital,  as 
will,  at  the  least  cost,  move  most  freely  the  in- 
creased commerce  of  all  parts  of  the  country.  I 
have  already  sought  to  show  that  it  is  improbable 
that  rivers  and  canals  can  be  so  developed  as  to 
make  the  cost  of  transportation  by  water  lower 
than  by  rail.  It  is  even  more  improbable  that 
their  development  would  provide  as  effectually  for 
the  free  movement  of  the  commerce  of  all  parts  of 
the  country  as  would  expansion  of  the  facilities  of 
the  railways.  It  is  practicable  to  develop  rivers 
and  canals  only  in  certain  sections;  and  these  are 
not  necessarily  the  parts  of  the  country  which 
most  need  additional  facilities  of  transportation. 
As  already  remarked,  the  principal  river  system 
of  this  country  runs  North  and  South,  while  the 
great  currents  of  commerce  flow  East  and  West. 
The  most  severe  congestions  of  traffic  in  the  win- 
ter of  1906  1907  were  on  the  railways  running 
from  the  Pacific  coast  to  the  Great  Lakes,  from 

216 


WATERWAYS   AS   REGULATORS   OF   RA-n^^q 

the  Trans-Missouri  country  and  the  Southwest  to 
Galveston,  and  from  Chicago  and  St.  Louis  to  the 
Atlantic  seaboard.  The  Mississippi  and  its  tribu- 
taries were  at  that  time  in  as  good  condition  to 
bear  a  large  commerce  as  any  waterways  in  Eu- 
rope ;  yet  they  were  not  resorted  to  to  relieve  the 
situation. 

Nor  does  past  experience  warrant  the  hope  that 
any  money  which  may  be  spent  by  the  govern- 
ment for  the  improvement  of  our  rivers  will  be  so 
laid  out  as  to  do  the  most  practicable  good.  Where 
such  expenditures  have  been  made  heretofore  has 
been  determined,  not  by  broad  and  statesmanlike 
consideration  of  the  interests  and  needs  of  the 
whole  country,  but  by  log-rolling  combinations  be- 
tween members  of  Congress  dictated  by  the  petty 
motive  of  local  greed.  On  the  other  hand,  it  is 
perfectly  feasible  to  secure  expansion  of  the  facil- 
ities of  the  railways  in  proportion  to  the  needs  of 
the  whole  country  and  of  each  part. 

Most  of  our  railways  are  but  skeletons  of  what 
they  should  be  made.  Our  total  railway  mileage 
is  over  240,000  miles,  and  of  this  only  22,000  miles 
is  double  tracked.  While  it  costs  much  less  to 
build  the  second  than  to  build  the  first  track,  the 
capacity  of  the  road  is  thereby  quadrupled.  The 
Board  of  Army  Engineers  estimates  that  it  would 
cost  $160,000,000  to  dig  a  channel  14  feet  deep 
from  Chicago  to  New  Orleans,  1,657  miles.  This 
would  build  and  equip  almost  2,000  miles  of  low 

217 


-p,j^.   AMERICAN    TRANSPORTATION    QUIOSTION 

grade,  double  tracked,  well-equipped  railway. 
Or,  it  would  build  and  equip  3,500  miles  of  good 
low  grade  single  track  railway.  Or,  it  would 
double  track  5,500  miles  of  existing  single  track 
railway,  thereby  increasing  the  capacity  of  the 
American  railway  system  the  equivalent  of  22,500 
single  track  miles.  The  $500,000,000  which  it  is 
proposed  to  spend  on  inland  waterways  during  the 
next  ten  years  would  build  and  equip  5,000  miles 
of  good  low  grade,  double  track  railway.  Or,  it 
would  build  and  equip  10,000  miles  of  good  low 
grade,  single  track  railway.  Or,  it  would  double 
track  almost  20,000  miles  of  existing  single  track 
railway,  which  would  be  equivalent  to  an  increase 
of  almost  60,000  miles.  It  should  be  noted  that 
the  figures  for  railways  include  terminals  and  nec- 
essary cars  and  locomotives  for  handling  the  pas- 
senger and  freight  traffic,  while  the  figure  for  the 
proposed  waterways  includes  nothing  for  the  boats 
and  terminals  provision  of  which  to  handle  a  heavy 
traffic  would  cost  a  large  sum.  As  I  have  already 
shown,  the  average  traffic  per  mile  per  year  on  the 
waterways  of  France  is  420,000  ton  miles  and  on 
the  waterways  of  Germany,  1,500,000  ton  miles. 
The  traffic  density  of  the  Elbe  is  5,800,000  ton 
miles  and  that  of  the  Rhine,  which  is  the  greatest 
in  Europe,  11,400,000  ton  miles.  The  railways  of 
the  United  States,  which  are  practically  a  single 
track  system,  in  1910  hauled  1,085,745  tons  one 
mile  and  138,250  passengers  one  mile  per  mile  of 

218 


WATERWAYS   AS   REGULATORS   OF   RATES 

line.  Numerous  single  track  railways  are  hand- 
ling much  more  traffic  per  mile  than  are  the  water- 
ways even  of  Germany;  and  the  numbers  of  ton 
miles  per  mile  of  line  handled  by  some  of  the 
double  or  multiple  track  railways  are  as  follows: 
Delaware,  Lackawanna  &  Western,  3,766,323; 
Pennsylvania  Railroad,  4,409,694;  Bessemer  & 
Lake  Erie,  6,498,677.  These  figures  show  that  the 
traffic  capacity  of  a  well-managed  American  rail- 
way is  comparable  to  that  of  the  greatest  inland 
waterways.  Furthermore,  when  additional  rail- 
way facilities — whether  they  consist  of  improve- 
ments in  old  lines  or  of  new  lines — are  provided 
by  private  capital  we  may  be  sure  that  they  will 
generally  —  although  not  always  —  be  provided 
where  they  will  be  of  the  most  public  utility. 
For  private  capitalists  naturally  would  invest 
where  the  largest  profits  were  to  be  secured ;  that 
would  be  where  there  was  available  the  largest 
traffic;  and  those  places  where  the  largest  traffic 
is  available  are  those  where  there  is  the  greatest 
need  for  additional  means  of  transportation.  The 
public  can  obtain  the  needed  increase  of  railway 
facilities  by  following  a  policy  of  regulation, 
which,  while  protecting  the  rights  and  interests 
of  the  public,  will  not  make  investment  in  rail- 
ways less  attractive  than  in  other  businesses. 

It  is  sometimes  said  that  while  the  government 
should  afford  every  reasonable  encouragement  to 
the  expansion  of  railways,  it  should  also  develop 

219 


THE    AMERICAN    TRANSPORTATION    QUESTION 

waterways  to  serve  as  auxiliaries.  But  develop- 
ment both  of  railways  and  of  rivers  and  canals 
may  often  involve  wasteful  duplication.  The  river 
or  canal  under  modern  conditions  is  adapted  only 
to  the  carriage  of  cheap  and  bulky  commodities. 
Each  community  needs  a  railway  to  haul  goods  re- 
quiring faster  and  better  carriage.  As,  once  the 
railway  is  built,  it  requires  all  the  traffic  it  can 
get,  high  grade  or  low  grade,  to  operate  most  eco- 
nomically per  unit  of  traffic,  it  is  usually  able,  if 
allowed  freely  to  adjust  its  rates,  to  underbid  the 
river  or  canal  for  even  low  grade  traffic' 

It  is  easily  conceivable  that,  in  a  country  where 
changes  in  commercial  and  industrial  conditions 

*  There  are  facilities  of  transportation  the  scientific  and 
systematic  improvement  of  which  by  the  federal  and  state 
governments  would  reduce  the  congestion  of  traffic  on  the 
railways  and  lower  the  cost  of  trnsportation  without  involv- 
ing wasteful  duplication.  These  are  the  public  highways. 
From  about  February  1  to  October  1  of  each  year  the  rail- 
ways have  many  thousands  of  idle  cars.  Late  in  September 
and  early  in  October  the  traffic  sweeps  on  them  in  a  deluge ; 
and  for  about  four  months  there  is  a  car  shortage  instead  of 
a  car  surplus.  These  annual  alternations  of  car  satiety  with 
car  famine  are  due  largely  to  the  condition  of  the  public 
highways.  In  the  greater  part  of  the  United  States  the 
snows,  and  the  alternate  thaws  and  freezes,  of  fall  and  win- 
ter, put  the  highways  in  such  bad  shape  that  it  is  hard  or 
impossible  to  pull  a  heavily  loaded  wagon  on  them.  In  con- 
sequence, most  farmers  rush  their  crops  to  market  soon  af- 
ter harvest.  At  the  same  time  the  railways  have  to  haul 
the  larger  part  of  the  coal  traffic ;  and  thus  they  are 
swamped.  If  the  highways  were  put  in  good  condition  the 
farmers  could  haul  their  crops  to  the  railway  stations  more 

220 


WATERWAYS   AS   REGULATORS   OF   RATES 

occur  so  rapidly  as  in  this,  the  time  might  come — 
even  within  a  comparatively  few  years — when  ad- 
ditional development  of  waterways  would  be  justi- 
fiable and  desirable.  But  the  criterion  of  whether 
it  is  desirable  at  any  particular  time  should  be  the 
extent  of  the  use  made  of  good  channels  previously 
provided.  The  government  having  provided  as 
good  channels  as  can  be  found  elsewhere,  nothing 
less  than  such  utilization  of  them  as  vindicates  past 
expenditures  can  afford  rational  ground  for  infer- 
ring that  their  future  improvement  or  the  con- 
struction of  new  channels  will  be  justified  by 
resulting  public  benefits. 

at  their  convenience,  and  the  annual  congestion  of  traffic 
would  be  alleviated.  The  country's  annual  bill  for  trans- 
portation would  also  be  much  reduced.  Mr.  Frank  Andrews, 
Expert  in  Transportation  of  the  Department  of  Agriculture, 
estimates,  after  a  thorough  investigation,  that  the  average 
cost  per  100  pounds  of  hauling  wheat  from  the  farms  to  the 
railway  stations  is  9  cents  ;  of  hauling  corn,  7  cents  ;  of  haul- 
ing cotton,  16  cents;  and  of  hauling  oats,  7  cents.  The 
average  lengths  of  the  hauls  are  5  to  10  miles.  The  average 
rail-and-ocean  rate  on  grain  from  St.  Louis  via  New  York 
to  Liverpool  is  less  than  15  cents  per  100  pounds.  It  is  ob- 
vious that  there  is  a  great  deal  better  opportunity  to  reduce 
the  cost  of  transportation  by  improving  the  public  highways 
than  by  improving  either  railways  or  waterways. 


CHAPTER  XI 

GOVERNMENT  REGULATION:  WHO  SHALL 
REGULATE  ? 

That  the  railroads  of  the  United  States  always 
in  future  ought  to  be  subjected  to  public  regulation 
every  one  now  concedes — at  least  in  public  utter- 
ance. The  advocates  of  laissez  faire,  if  not  con- 
verted, have  at  least  been  silenced.  The  main 
question  now  in  issue  is,  not  whether  there  shall 
be  regulation,  but  who  shall  regulate,  and  how. 

Many  who  hold  otherwise  very  different  views 
agree  in  fearing  that  a  satisfactory  policy  of  regu- 
lation will  not  be  worked  out.  One  class  appre- 
hends that  regulation  will  be  too  weak  and  ineffec- 
tive to  remedy  the  shortcomings  and  curb  the 
abuses  that  it  considers  almost  ineradicable  char- 
acteristics of  private  railway  ownership  and  oper- 
ation. Another  class  fears  that  regulation  will 
be  so  unintelligent,  pervasive,  drastic,  and  bur- 
densome, that  it  will  take  the  life  out  of  railway 
managers;  make  rates  inelastic  and  ill-adapted  to 
commercial  needs;  repel  capital  from  the  railway 
business;  and  cause  the  service  rendered  to  deteri- 
orate and  the  facilities  provided  to  be  inadequate. 
These  two  classes  of  persons,  while  anticipating 

222 


GOVERNMENT   REGULATION 

such  different  mediate  results  of  government  reg- 
ulation, concur  in  thinking  that  its  ultimate  result 
will  be  government  ownership. 

The  experience  of  Europe  is  cited.  Germany, 
Belgium,  Italy,  Austria,  Switzerland  have  gone 
from  government  regulation  to  government  owner- 
ship. France,  after  long  owning  and  operating 
one  small  road  and  exercising  strict  supervision 
over  six  large  lines,  has  taken  over  one  of  these 
big  lines — the  Western.  But  European  experi- 
ence, while  instructive,  is  not  conclusive.  Special 
conditions  have  in  every  case  caused  public  regula- 
tion to  be  succeeded  there  by  public  ownership. 
Our  political  and  industrial  history  and  institu- 
tions are  different  from  those  of  European  coun- 
tries; and  in  this  matter,  as  in  some  others,  we 
may,  perhaps,  find  it  more  expedient  to  be  taught 
by  their  experience  than  to  follow  their  example. 

There  is,  however,  some  ground  for  each  of  the 
views  that  have  been  outlined.  What  time  shall 
bring  forth  will  depend  on  both  the  railway  own- 
ers and  managers,  and  the  public.  The  internal 
management  of  our  railways  was  never  so  honest 
and  efficient  as  now.  Never  did  their  rates  and 
service  merit  so  much  public  approval  and  so  little 
public  condemnation.  But  there  are  still  short- 
comings and  abuses — numerous  unfair  discrimina- 
tions in  rates  and  service;  more  or  less  serious  de- 
ficiencies of  operation  and  service;  occasional 
discreditable  manipulations  of  finances;  in  some 

223 


tup:    AMERICAN    TRANSPORTATION    (QUESTION 

places  dictation  in  and  corruption  of  politics. 
Public  sentiment  rightly  demands  the  correction 
of  these  conditions.  The  railways  ought  to  cor- 
rect them  without  the  compulsion  of  law.  Past 
experience  indicates  that  if  they  do  not,  more  and 
more  legislation  for  the  regulation  of  more  and 
more  details  of  their  business  will  ensue.  If  this 
be  ineffective  the  public  will  likely  conclude  that 
the  only  means  of  establishing  satisfactory  rela- 
tions between  the  carriers  and  those  they  serve  is 
government  ownership.  If  this  more  detailed  and 
drastic  regulation  be  not  only  adopted,  but  made 
effective,  the  ultimate  result  may  be  the  same. 
For  there  are  limits  beyond  which  effective  regu- 
lation cannot  be  carried  without  generating  new 
evils  for  each  it  remedies.  The  public  is  natur- 
ally apt  to  think — as  it  usually  has  thought — that 
the  new  evils  are  due  to  inadequate,  not  to  excess- 
ive, regulation;  and,  instead  of  ameliorating  its 
policy,  probably  would  make  it  more  restrictive  and 
burdensome.  The  result  would  be  that,  in  course 
of  time,  we  would  have  public  management  of 
private  property. 

Now,  while  public  regulation  of  private  property 
may  succeed,  public  management  of  private  prop- 
erty could  not.  It  would  involve  divided  respon- 
sibility of  the  worst  form.  There  would  be  in- 
cessant struggles  between  the  officers  selected  to 
represent  the  owners,  seeking  to  recover  the  au- 
thority they  had  lost,  and  the  regulating  authori- 

224 


GOVERNMENT   REGULATION 

ties  representing  the  public,  seeking  to  keep  and 
increase  the  authority  they  had  gained.  Each  side 
would  exert  itself  more  to  nullify  the  work  of  the 
other  than  by  its  own  policies  to  get  good  results. 
The  rates  made,  the  facilities  furnished,  the  service 
rendered,  would,  while  this  conflict  was  on,  go 
from  bad  to  worse ;  and  neither  the  public  nor  the 
owners  could  fix  the  responsibility,  or  hold  ac- 
countable those  responsible.  The  public  authori- 
ties would  assure  the  public  that  they  were  due  to 
the  recalcitrancy,  incompetency  and  want  of  pub- 
lic spirit  of  the  railway  officers;  the  railway  oflS- 
cers  would  tell  the  owners  of  the  railways  that 
they  were  due  to  the  meddlesomeness,  the  igno- 
rance and  the  incapacity  of  the  public  authorities 
— and  each  probably  would  be  half  right.  The 
capital  needed  for  adequate  development  and  ex- 
tensions would  not  be  forthcoming;  for  the  public 
could  not  lay  it  out  so  long  as  the  ownership  of  the 
roads  was  private,  and  private  capitalists  would 
not— probably  could  not — supply  it  while  the  man- 
agement was  public.^    The  resulting  conditions 

'  "We  can  provide  by  legislation  the  sort  of  cars  which  a 
railroad  shall  use  and  the  rates  which  it  shall  impose ;  we 
cannot  by  legislation  force  one  single  dollar  of  private  capi- 
tal into  a  railroad  investment  against  its  will.     .     .     . 

"This  phase  of  the  matter  is  too  little  considered.  If 
this  government  hopes  to  continue  its  present  system  ;  if  we 
are  to  look  in  the  future  as  in  the  past  to  private  capital 
for  the  providing  of  our  railroad  transportation,  it  is  funda- 
mentally necessary  that  confidence  in  the  fair  ti'eatmcjiit  of 

225 


TIIR    AMERICAN    TRANSPORTATION    QUESTION 

would  be  intolerable;  and  both  the  owners  of  the 
railways  and  the  public  might  throw  themselves 
into  the  arms  of  government  ownership  as  the 
only  haven  of  escape. 

So,  if  the  owners  and  managers  of  the  railways, 
and  the  public,  desire  to  avoid  government  owner- 
ship it  behooves  the  former  to  give  to  the  public 
everything  to  which  it  is  entitled,  and  to  do  it 
public-spiritedly,  diplomatically,  honestly;  and  it 
equally  behooves  the  public  to  exercise  self-re- 
straint, and  act  in  a  spirit  of  justice,  according  to 
the  owners  and  managers  reasonable  freedom  of 
action  in  the  management  of  the  properties,  and 
the  opportunity  to  earn  and  enjoy  reasonable 
profits. 

If  only  the  salutary  solution  of  the  railway  prob- 
lem depended  on  the  dealings  of  the  public  and 
the  railways  with  each  other,  the  importance  of 
the  nature,  and  the  results,  of  their  dealings  would 
be  great.  But  much  more  is  involved.  The  de- 
velopment of  large  railway  corporations  and  com- 
binations has  been  contemporaneous  with  the  de- 
velopment of  equally  large  industrial  corporations 
and  combinations.  It  is  often  said  that  the  reason 
why  it  is  right  and  expedient  for  the  public  to 
regulate  railways  is  that  they  are  quasi-public  cor- 


that  capital  shall  be  established."— From  an  address  on 
"Transportation"  by  Commissioner  C.  A.  Prouty,  of  the 
Interstate  Commerce  Commission,  at  Sheffield  Scientific 
School,  Yale  University. 

226 


GOVERNMENT   REGULATION 

porations ;  that  they  exercise  the  power  of  eminent 
domain,  and  render  a  public  service.  But  this  ex- 
planation is  purely  juridical.  It  merely  tells  why 
the  government  legally  ca}L  regulate  railways — not 
why  it  should  and  does.  That  it  can  do  so  is  no 
reason  at  all  why  it  should  do  so.  The  only  sound 
reason  why  it  should  do  so  is  that  the  public  wel- 
fare requires  it;  and  the  public  welfare  requires 
it,  not  because  the  railway  exercises  the  power  of 
eminent  domain,  not  because  it  is  engaged  in  a 
public  service,  but  because  it  is  monopolistic  in  its 
nature  and  has  a  relation  to  industry  and  com- 
merce that  enables  it,  if  improperly  managed,  to 
do  measureless  evil. 

Now,  recently  many  concerns  which  are  not  in 
the  technical  legal  sense  engaged  in  rendering 
public  services  have  got  more  nearly  complete 
monopolies  of  their  lines  of  business  than  is  pos- 
sessed by  any  railway  or  combination  of  railways. 
It  may  be  that  their  monopolistic  size  and  power 
will  be  temporary.  It  is  more  probable  they  will 
be  permanent.  If  they  are  there  will  be  as  good 
reason  for  extending  public  regulation  to  them  as 
there  is  for  subjecting  railways  to  it.  The  first 
steps  in  this  direction  have  been  taken  by  the  cre- 
ation of  the  Bureau  of  Corporations,  by  the  pas- 
sage of  the  Sherman  Antitrust  Law,  the  corpora- 
tion tax  law,  the  meat  inspection  law,  etc.  The 
nature  and  the  results  of  the  regulation  applied  to 
railways  inevitably  will  largely  determine  the  na- 

227 


THE    AMERICAN    TRANSPORTATION    QUESTION 

ture  and  the  results  of  the  regulation  applied  to 
large  industrial  corporations.  And  there  is  just 
as  much  reason  to  believe  that  the  success  or  fail- 
ure of  the  regulation  of  large  industrial  corpora- 
tions will  determine  whether  their  businesses  shall 
be  taken  over  by  government  as  there  is  for  be- 
lieving that  the  success  or  failure  of  the  regulation 
of  railways  will  determine  whether  they  shall  be 
taken  over.  Therefore,  the  policy  of  railway  reg- 
ulation adopted,  and  its  results,  are  apt  to  play  a 
very  important  part  in  settling  whether  this  coun- 
try shall  in  course  of  time — perhaps  in  course  of  a 
comparatively  short  time — become  a  social-demo- 
cratic state.  This  may  appear  to  some  an  extreme 
view;  but  it  is  hard  to  see  how  it  can  be  so  re- 
garded by  those  who  realize  the  industrial  revolu- 
tion that  has  taken  place  in  the  United  States  in 
the  last  quarter  century,  and  the  change  in  public 
sentiment  which  has  accompanied  it  and  is  still 
going  on,  regarding  the  proper  fonn  and  functions 
of  government. 

The  problem  of  how  the  railways  ought  to  be 
regulated  probably  would  be  advanced  a  good  way 
toward  solution  by  settlement  of  the  question  of 
who  shall  regulate  them.  Heretofore  each  railway 
doing  an  interstate  business  has  been  subject  to 
regulation  by  both  the  federal  and  state  govern- 
ments. The  laws  passed  by  Congress  and  the 
state  legislatures,  and  the  orders  issued  by  the 
various  commissions,  have  been  usually  inconsis- 

228 


GOVERNMENT   REGULATION 

tent  and  often  directly  conflicting,  and  large  rail- 
ways subject  to  the  laws  not  only  of  the  federal 
government  but  of  a  number  of  states,  often  have 
found  it  practically  impossible  to  obey  them  all. 
Most  persons  who  have  given  the  matter  much 
thought  believe  it  would  be  better  for  both  rail- 
ways and  public  if  practically  exclusive  control 
were  vested  in  the  federal  government.  That  this 
would  have  been  done  by  the  framers  of  our  na- 
tional Constitution,  if  they  had  foreseen  present 
conditions,  seems  most  probable. 

A  good  many  years  ago  Judge  Cooley,  the  first 
chairman  of  the  Interstate  Commerce  Commission, 
and  one  of  the  greatest  of  American  jurists,  said:^ 

It  may  be  that  by  and  by  the  general  government, 
surveying  the  field  of  interstate  commerce  and  taking 
note  how  state  commerce  encroaches  upon  and  inter- 
mingles with  it,  crowding  it  in  the  same  vehicles  on 
the  same  roads,  sharing  with  it  the  same  expenses, 
rates  which  are  imposed  upon  the  one  necessarily 
affecting  rates  which  can  be  accepted  on  the  other,  and 
being  handled  at  the  same  time  by  the  same  hands, 
under  the  same  official  control,  will  come  to  the  con- 
clusion that  separate  regulation  of  state  commerce 
must  necessarily  be,  to  some  extent,  at  least,  and  may 
be  to  a  large  extent,  inconsistent  with  complete  federal 
regulation  of  the  commerce  that  is  interstate.  Should 
this  conclusion  be  reached  the  federal  legislature  is  not 


'  "Comparative  Merits  of  Written  and  Prescriptive  Con- 
stitutions," 2  Harvard  Law  Review,  341-357. 
16  229 


THE    AMERICAN    TRANSPORTATION    QUESTION 

unlikely  to  take  unto  itself  complete  regulation  of  the 
whole. 


The  Constitution  of  the  United  States  expressly 
confers  on  Congress  authority  to  regulate  com- 
merce among  the  states.  The  courts  long  since 
held  that  any  state  law  or  regulation  expressly  in- 
tended to  regulate  interstate  commerce,  and  hav- 
ing that  effect,  violated  this  constitutional  provi- 
sion. Suppose,  however,  that  a  state  law  purports 
to  be  intended,  or,  indeed,  is  intended,  solely  to 
regulate  commerce  within  a  state.  Can  it  ever 
produce  such  effects  as  to  make  it  conflict  with 
the  federal  constitution? 

This  question  has  recently,  for  the  first  time, 
been  directly  presented  to  the  federal  courts,  and 
passed  on  by  one  of  them.  The  state  of  Minnesota 
fixed  passenger  and  freight  rates  for  transporta- 
tion within  its  boundaries  which  were  lower  than 
the  corresponding  rates  between  points  within  the 
state  and  points  outside  of  it.  The  effect  was  to 
compel  the  railways  to  reduce  their  interstate 
rates;  for  if  they  did  not,  shippers  could  ship  and 
travelers  could  travel  to  the  border  of  the  state  on 
the  low  state  rates,  and  then  reship  from  there,  or 
purchase  new  tickets  there,  thus  getting  the  bene- 
fit of  the  lower  state  rates  on  what  were  really  in- 
terstate shipments  and  trips.  Furthermore,  for 
the  railways  to  have  charged  lower  rates  on  state 
than  interstate  commerce,  handled  under  similar 

230 


GOVERNMENT   REGULATION 

conditions,  would  have  been  an  unjustifiable  dis- 
crimination against  interstate  commerce.  The 
railways,  therefore,  contended  that  the  laws  and 
regulations  of  Minnesota  directly  and  necessarily 
interfered  with  interstate  commerce  and  were  un- 
constitutional. Judge  W.  H.  Sanborn  of  the  United 
States  Circuit  Court  for  the  district  of  Minnesota, 
in  a  momentous  decision,  sustained  this  conten- 
tion,' saying  that  any  state  regulation  which  di- 
rectly and  necessarily  interferes  with  interstate 
commerce  is  an  encroachment  on  the  exclusive  au- 
thority of  Congress  to  regulate  commerce  among 
the  states,  and  therefore  null  and  void.  If  the 
Supreme  Court  of  the  United  States  sustains  this 
decision  it  will  narrow  and  limit  the  power  of  the 
states  to  regulate  even  state  commerce.  It  is  hard 
to  see  how  the  Supreme  Court  can  do  otherwise, 
for  to  let  the  states  continue  to  regulate  railway 

'  Judge  Sanborn  summed  up  his  conclusions  in  the  follow- 
ing word's : 

"No  case  has  been  found  in  the  books  in  which  the  facts 
disclose  a  more  substantial  burden  imposed  upon  interstate 
commerce  by  the  acts  or  orders  of  the  officers  of  any  state 
than  that  which  the  effect  of  the  necessary  operation  of 
these  acts  and  orders  entails  upon  the  interstate  commerce 
of  these  companies.  If,  in  the  early  proceedings  in  the 
Northern  Pacific  case,  the  Supreme  Court  was  moved  to 
say  of  the  issue  whether  the  necessary  effect  of  these  acts 
and  orders  was  to  interfere  with  and  regulate  interstate 
commerce,  'the  question  is  not,  at  any  rate,  frivolous,'  how, 
now,  that  their  necessary  effect  upon  that  commerce  has 
been  indisputably  proved  to  be  not  only  general  and  sub- 
stantial, but  controlling,  may  they  escape  the  ban  of  the 

231 


THE    AMERICAN    TRANSPORTATION    QUESTION 

operation  and  rates  without  regard  to  the  laws 
passed  and  the  rates  fixed  by  the  federal  govern- 
ment would  be  to  let  them  largely  or  wholly  nullify 
the  policy  adopted  by  the  nation. 

While  the  Supreme  Court  may  hold  that  where  a 
state  law  or  regulation  necessarily  interferes  with 
or  nullifies  a  federal  law  or  regulation  the  former 
must  yield,  it  is  not  at  all  probable—  nor,  perhaps, 
is  it  desirable — that  the  states  will  be  prohibited 
from  making  any  reasonable  regulations  which  do 
not  directly  interfere  with  interstate  commerce. 
Congress,  then,  by  setting  a  good  example,  and 
firmly  limiting  the  activities  of  state  legislatures 
and  commissions,  can  foster  a  railroad  policy  that 
will  benefit  both  the  carrier  and  the  public. 

Another  phase  of  the  question  of  who  shall  reg- 
ulate is  whether  it  shall  be  done  by  the  law  mak- 
ers directly  or  through  commissions.     The  nation 

Constitution?  If  one  state  might  by  such  radical  reductions 
of  its  local  fares  and  rates  below  legal  and  interstate  fares 
and  rates  constitutionally  use  the  laws  of  trade  and  the  pro- 
hibition of  discriminations  in  the  interstate  commerce  law 
to  force  like  reductions  of  interstate  rates,  all  states  might 
do  so,  and  the  power  of  the  states  to  regulate  fares  and 
rates  in  interstate  commerce  would  be  supreme  and  that  of 
Congress  and  the  Interstate  Commerce  Commission  inferior 
and  futile.     Such  does  not  seem  to  be  the  law. 

"Each  of  the  acts  and  orders  challenged  has  the  natural 
and  necessary  effect  substantially  to  burden  and  directly  to 
regulate  interstate  commerce,  to  create  undue  and  unjust 
discriminations  between  localities  in  Minnesota  and  those  in 
adjoining  states,  and  it  is  unconstitutional  and  void." 

232 


GOVERNMENT   REGULATION 

has  had  since  1887  an  Interstate  Commerce  Com- 
mission whose  powers  were  greatly  enlarged  by 
the  Hepburn  act  of  1906  and  by  the  Mann-Elkins 
act  and  other  legislation  in  1910.  There  are  also  43 
state  commissions.  We  have  wisely  adopted  the 
theory  that  so  difficult  and  technical  a  subject 
should  be  dealt  with  by  a  small  body  of  experts  in 
practically  continuous  session.  Unfortunately,  the 
state  legislatures,  while  abstractly  indorsing  this 
theory,  often  cannot  be  got  to  act  conformably 
with  it.  During  recent  years,  in  all  parts  of  the 
country,  they  have  constantly  interfered  with 
work  they  had  previously  delegated  to  the  com- 
missions. For  example,  repeatedly,  after  having 
given  the  rate-regulating  power  to  commissions, 
they  have  stepped  in  and  themselves  fixed  rates, 
sometimes  against  the  open  opposition  of  the  com- 
missioners who  had  been  chosen  as  the  most  com- 
petent persons  to  do  this  work.  If  railroad  com- 
missions are  to  command  the  respect  of  railroads, 
shippers  and  the  public,  if  they  are  to  perform 
their  duties  fairly,  intelligently  and  beneficially, 
they  and  their  work  must  be  left  as  free  from  leg- 
islative interference  as  are  the  courts  and  their 
work. 

It  is,  however,  far  from  enough  to  make  their 
labors  effective,  just  and  beneficial,  for  them  to 
be  given  ample  power  and  left  to  exercise  it  with- 
out undue  legislative  interference.  Their  person- 
nel is  of  the  first  importance.    Their  members 

233 


Till']    AMIORICAN    TRANSPORTATION    QUESTION 

should  be  men  of  great  ability.  They  deal  with 
matters  vital  to  the  welfare  of  the  country;  and 
only  men  of  first  rate  ability  can  properly  deal 
with  such  thing's.  They  should  be  impartial  and 
disinterested.  Only  men  who  are  not  only  able 
but  also  impartial  and  disinterested,  can  command 
the  respect  of  railway  managers,  shippers  and 
others  directly  concerned;  and  that  they  should 
command  respect  is  as  important  as  that  they 
should  have  the  naked  legal  power  to  compel  ac- 
quiescence in  their  views.  They  have  to  settle 
questions,  all  of  which  are  somewhat  technical,  and 
many  of  which  are  very  technical.  They  should, 
therefore,  have  a  special  knowledge  of  these  mat- 
ters when  chosen,  or  at  least  should  be  allowed  to 
hold  office  long  enough  to  acquire  such  knowledge, 
and  after  having  acquired  it  to  use  it  for  a  sub- 
stantial period  in  the  public  service. 

The  Massachusetts  Commission  has  never  pos- 
sessed extensive  legal  powers.  Yet  no  commission 
ever  has  done  work  at  once  so  effective  and  so  sal- 
utary as  the  Massachusetts  Commission  did  in  its 
early  history.  This  was  because  it  was  dominated 
by  a  man  having  in  preeminent  degree  all  the 
qualifications  mentioned — Charles  Francis  Adams. 
As  Dr.  Hadley  has  said:* 

This  absence  of  specific  powers  was  just  what  Mr. 


'"Ethics  of  Corporate  Management, "  JVori^  American 
Review,  January  18,  1907. 

234 


GOVERNMENT    REGULATION 

Adams  welcomed.  It  threw  the  commission  back  on 
the  power  of  common  sense — which  does  not  seem  as 
strong  as  statutory  power  to  prosecute  people  and  put 
them  in  prison,  but  which,  in  the  hands  of  a  man  who 
really  possesses  it,  is  actually  very  much  stronger.' 

The  personnels  of  most  railway  commissions 
have  fallen,  and  still  fall,  grievously  short  of  the 
requirements.  About  three  years  ago  I  made  a 
study  of  the  state  commissions  as  then  consti- 
tuted. ^  The  principal  points  covered  were  whether 
the  commissioners  were  elective  or  appointive, 
their  previous  occupations,  the  annual  salaries 
paid,  the  terms  for  which  they  were  chosen,  and 
the  number  of  years  each  had  served.  I  secured 
these  data  concerning  40  state  commissions  and 
the  Interstate  Commerce  Commission.  Of  the  124 
members  of  state  commissions  only  13  were  for- 
mer railway  officers  or  employees.  None  of  these 
had  held  a  higher  railway  office  than  that  of 
auditor  or  assistant  general  superintendent ;  most 

'Dr.  Hadley  adds:  "And  when  commissions  of  more 
recent  years,  disregarding  the  experience  of  Mr.  Adams, 
have  besought  over  and  over  again  for  an  increase  of  their 
power  to  make  rates,  and  their  power  to  prosecute  offenders, 
and  their  power  to  keep  the  courts  from  reviewing  their  acts, 
I  am  reminded  of  the  minister  in  the  country  church,  who 
said:  '0  Lord,  we  pray  for  power;  O  Lord,  we  pray  for 
power,'  until  an  old  deacon,  unable  to  contain  himself, 
interrupted.  '  'Tain't  power  you  lack,  young  man,  it's 
idees. '  " 

-Railway  Age  Gazette,  January  15, 1909 ;  pages  99  and  123. 
235 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  them  had  been  conductors,  telegraph  operators, 
road-masters,  etc. ;  and  despite  the  fact  that  their 
most  important  work  is  to  regulate  rates,  but  one 
had  ever  had  any  experience  in  the  traffic  depart- 
ment of  a  railway  or  an  industrial  concern. 

The  number  of  lawyers  on  the  commissions,  42, 
was  much  larger  than  the  number  of  men  from 
any  other  vocation.  Many  of  these,  as  active  pol- 
iticians, had  energetically  participated  in  agita- 
tions against  the  railways.  The  previous  occupa- 
tions of  other  members  of  the  state  commissions 
were  reported  as  follows:  Business  men,  5;  mer- 
chants, 3;  cotton  factors,  2;  real  estate  dealers,  2; 
insurance  agent,  1;  mine  operator,  1;  engineers, 
3;  railway  contractor,  1;  farmers,  12;  manufac- 
turers, 5;  lumberman,  1;  newspaper  men,  2;  trans- 
fer man,  1;  physician,  1;  assistant  secretary  Mu- 
nicipal Art  Commission,  1;  assistant  secretary 
Interstate  Commerce  Commission,  1;  state  land 
agent,  1;  bankers,  6;  coal  operator,  1;  teacher,  1; 
economist,  1;  commissioner,  1;  sheriff,  1. 

The  commissions,  it  will  be  seen,  contained  a 
large  number  of  manufacturers,  merchants,  farm- 
ers and  other  shippers,  and  a  comparatively  small 
sprinkling  of  former  railway  officers  and  employ- 
ees. Their  main  duty  is  to  arbitrate  between 
shippers  and  railways.  A  shipper  who  becomes  a 
railway  commissioner  is  apt  to  have  a  leaning  in 
favor  of  shippers,  just  as  a  railway  man  who  be- 
comes a  commissioner  is  apt  to  have  a  leaning  in 

236 


GOVERNMENT   REGULATION 

favor  of  railways.  However  upright  the  intentions 
of  the  state  commissions,  the  previous  occupa- 
tions and  affiliations  of  most  of  their  members 
gives  them  a  bias,  conscious  or  unconscious, 
against  the  railways;  many  are,  in  effect,  packed 
courts. 

Experience  has  shown  that  the  fittest  men  will 
be  secured  when  the  commissions  are  appointive. 
In  one  state  whose  commission  is  appointive  the 
governor  named  a  leading  lawyer,  a  distinguished 
professor  of  political  economy  and  an  expert  sta- 
tistician who  was  also  a  good  economist.  In  a 
state  having  an  elective  commission  the  people 
chose  at  about  the  same  time  as  two  of  the  com- 
missioners a  cowboy  who  had  "killed  his  man" 
and  who,  since  his  election,  has  been  arrested  for 
threateningly  flourishing  his  gun  in  public,  and  a 
man,  who,  a  short  time  before,  had  bought  a  gold 
brick  for  $10,000.  In  another  state  the  people 
elected  and  have  since  reelected  to  the  railroad 
commission  a  man  whose  only  claim  on  their  suf- 
frages was  that  while  a  railroad  brakeman  he  had 
lost  both  his  legs  in  a  railroad  accident.  Cow- 
boys, purchasers  of  gold  bricks  and  crippled  brake- 
men  are  not  the  kind  of  men  who  will  solve  the 
problem  of  fair  and  salutary  regulation  of  rail- 
ways. While  experience  has  shown  that  the  bet- 
ter commissioners  are  secured  by  appointment,  of 
40  commissions  in  1909,  22  were  elective  and  18 
appointive. 

237 


THE    AMERICAN    TRANSPORTATION    QUESTION 

The  holding  of  public  office,  to  our  discredit,  is 
not  regarded  as  so  much  of  an  honor  here  as  in 
Europe.  To  get  men  of  ability  to  enter  the  public 
service  it  is  usually  necessary  to  pay  them  sub- 
stantial salaries.  The  average  salary  of  the  chair- 
men and  members  of  the  state  commissions  in  1909 
was  about  $4,000  a  year.  As  low  as  this  is,  con- 
sidering the  importance  of  their  duties  and  re- 
sponsibilities, it  is  misleadingly  large.  For  the  10 
members  of  the  two  New  York  commissions  get 
salaries  that  aggregate  $150,000  a  year,  which 
would  furnish  salaries  at  $4,000  a  year  for  37  com- 
missioners. The  large  salaries  of  the  New  York 
commissioners  greatly  raise  the  average.  The 
salaries  range  from  $15,000  in  New  York  to  $1,200 
in  North  Dakota.  Twenty-four  states  pay  less 
than  $4,000;  19  pay  $3,000  or  less;  12  pay  $2,500  or 
less;  only  6  pay  $5,000  or  more. 

The  commissioners  are  chosen  for  terms  of  two 
to  six  years,  the  average  being  four  years.  The 
average  time  that  had  been  served  by  the  commis- 
sioners when  I  made  my  investigation  was  three 
years.  The  average  service  of  the  incumbents 
was  less  than  the  average  length  of  the  legal 
terms  not  only  because  changes  in  the  personnel 
of  the  commissions  are  frequent,  but  also  because 
a  number  of  commissions  had  recently  been  cre- 
ated. That  the  practice  of  constantly  chang- 
ing commissioners  continues,  however,  is  shown 
by  the  fact  that  within  two  years  after  my  anal- 

238 


GOVERNMPJNT   REGULATION 

ysis  38  changes  had  been  made  in  the  person- 
nel of  the  40  commissions  included  in  it. 

Next  to  choosing  experts  to  do  difficult  and  im- 
portant work  the  best  way  is  to  keep  at  work 
those  chosen  until  experience  makes  them  experts. 
We  do  neither.  A  man  of  good  ability  would  have 
to  work  hard  to  get  reasonably  familiar  with  any 
one  of  the  leading  branches  of  the  railway  busi- 
ness in  the  average  time  that  the  state  commis- 
sioners serve ;  and  they  are  charged  with  the  duty 
of  regulating  not  merely  one  branch,  but  all. 

The  facts  about  the  Interstate  Commerce  Com- 
mission are  widely  different.  Its  members  are 
appointed  for  seven  years  and  often  reappointed. 
They  are  paid  salaries  of  $10,000  a  year.  Most  of 
them  have  been  men  of  good,  and  some  of  them  of 
great,  ability.  The  two  members  last  appointed 
had  served  as  chairmen  of  state  commissions,  B. 
H.  Meyer  in  Wisconsin,  and  C.  C.  McChord  in 
Kentucky.  Professor  Meyer  also  long  has  had  an 
international  reputation  as  an  authority  on  railway 
economics.  Unfortunately,  very  few  of  the  com- 
missioners have,  like  Professor  Meyer  and  Mr. 
McChord,  acquired,  previously  to  their  selection, 
either  in  or  out  of  the  railway  business,  any  spe- 
cial knowledge  of  or  qualifications  for  their  duties. 
They  usually  have  been  lawyers  and  commonly 
have  been  chosen,  retained  and' retired  largely  for 
political  reasons.  Owing  to  these  and  other  causes 
it  must  be  regretfully  said  that  many  persons,  in- 

239 


THl';    AMERICAN    TRANSPORTATION    QUESTION 

eluding  most  railway  officers,  lack  full  confidence 
in  the  Commission's  expertness  and  impartiality. 
Most  of  its  members  have  been  wanting  in  what 
Dr.  Hadley  called  the  "ethical  influence"  exer- 
cised by  Charles  Francis  Adams  when  he  was  on 
the  Massachusetts  commission.  They  have  not 
got  their  important  recommendations  adopted  by 
the  railways,  as  Mr.  Adams  did,  "without  any  au- 
thority except  the  authority  of  common  sense." 
They  have  constantly  sought  and  obtained  in- 
creased statutory  authority. 

As  Dr.  Hadley  has  remarked,  when  you  increase 
the  powers  of  a  commission  you  often  reduce  its 
power.  When  it  has  numerous  specific  statutory 
powers  it  is  apt  to  resort  to  their  constant  coer- 
cive exercise  instead  of  taking  the  slower  course 
of  trying  by  logic  to  convince  that  the  changes  it 
favors  should  be  made,  and  by  moral  influence  to 
get  them  made  merely  because  they  are  right. 
Changes  wrought  by  the  exercise  of  statutory 
power  may  be  more  numerous  and  often  quicker; 
but  changes  effected  by  the  pressure  of  logic  and 
moral  suasion  are  much  surer  to  be  true  and  lasting 
reforms. 

James  Madison,  writing  in  The  Federalist  in 
advocacy  of  the  adoption  of  our  federal  constitu- 
tion,* said: 

The  accumulation  of  all  powers,  legislative,  executive 


The  Federalist,  No.  XLVII. 
240 


GOVERNMENT    REGULATION 

and  judiciary,  in  the  same  hands,  whether  of  one,  a 
few  or  many,  and  whether  hereditary,  self-appointed 
or  elective,  may  justly  be  pronounced  the  very  defini- 
tion of  tyranny. 

Now,  this  accumulation  of  legislative,  executive 
and  judicial  pov^ers  has  been  made  in  the  hands  of 
our  state  and  interstate  railw^ay  commissions;  and 
the  real  shortcomings  which  the  commissions 
have,  and  the  additional  more  or  less  imaginary 
shortcomings  which  many  think  they  have,  are 
undoubtedly  very  largely  due  to  this.  It  is  the 
function  of  the  legislative  department  to  make  the 
laws.  The  courts  have  held  that  the  fixing  ox 
rates  to  be  charged  by  a  public  service  corporation 
is  a  legislative  act  which  may  be  performed  by 
the  lawmakers  themselves  or  delegated  by  them  to 
a  commission.  This  power  Congress  and  the  vari- 
ous legislatures  have  delegated  to  the  railway 
commissions.  The  courts  have  held  that  the  de- 
termination of  the  reasonableness  of  rates  is  a 
judicial  function;  and  this  power  has  been  given 
to  the  commissions.  The  enforcement  of  the  laws 
is  an  executive  function;  and  the  authority  and 
the  duty  to  enforce  the  laws  regarding  railway  s 
have  also  been  given  to  the  commissions. 

The  most  serious  incompatibility  between  their 
functions  is  that  between  their  executive  and 
their  judicial  duties.  The  Interstate  Commerce 
Commission  may  be  engaged  at  one  hour  in  the 

241 


THE    AMERICAN    TRANSPORTATION    QUESTION 

executive  work  of  enforcing  the  laws  regarding 
rebating,  the  equipment  of  engines  and  cars  with 
safety  appliances,  or  the  inspection  of  locomotive 
boilers;  or  appearing  as  the  defendant  in  a  suit 
brought  to  set  aside  one  of  its  orders.  It  may  in 
the  very  next  hour  turn  to  its  most  important  work 
— that  of  arbitrating  between  shippers  and  rail- 
ways regarding  the  reasonableness  of  rates.  The 
railways  whose  rates  are  in  question  may  be  the 
very  same  against  which  the  Commission,  in  the 
performance  of  its  executive  duties,  has  just  been 
starting  prosecutions.  Or  they  may  have  just 
made  the  Commission  the  defendant  in  a  proceed- 
ing to  set  aside  some  order  issued  by  it.  Now,  it 
is  not  human  nature  for  men  to  treat  entirely 
without  prejudice  those  who  resist  or  try  to  re- 
strict or  overthrow  their  authority,  or  whom  they 
regard  as  guilty  of  violations  of  the  law  and 
against  whom  they  have  just  set  it  in  motion;  the 
detective  does  not  look  with  impartial  eye  upon 
the  suspect,  or  the  prosecuting  attorney  on  the 
prisoner  at  the  bar,  however  conclusively  he  may 
subsequently  prove  his  innocence;  if  they  did  they 
would  be  inefficient  detectives  and  prosecuting  at- 
torneys. But  railway  commissioners  are  human. 
There  is  always,  therefore,  very  serious  danger 
that  the  commission  will  be  haunted  in  its  task 
of  determining  the  reasonableness  of  rates  by  a 
bias  against  the  carriers  generated  by  its  ac- 
tivity in  enforcing  the  laws.     This  has  been  most 

242 


GOVERNMENT   REGULATION 

clearly  conceded  and  expressed  by  one  of  the 
ablest,  fairest  and  most  experienced  members  of 
the  Interstate  Commerce  Commission.  In  a  speech 
before  the  American  Bar  Association  at  Portland, 
Maine,  in  August,  1909,  Commissioner  Charles  A. 
Prouty  said: 

It  has  been  in  the  past  one  of  the  most  serious  re- 
proaches against  that  act  [the  act  to  regulate  com- 
merce] that  the  Commission  was  made  by  its  terms  at 
once  a  prosecuting  officer  and  judge  .  .  .  It  is  com- 
manded to  enforce  the  provisions  of  the  act  to  regulate 
commerce  ,  .  .  These  duties  are  largely  executive. 
They  can  best  be  discharged  by  a  single  head  responsi- 
ble to  the  executive  and  answerable  to  the  spur  of 
popular  criticism.  Second,  this  Commission  is  in  es- 
sence a  judicial  tribunal  which  hears  and  decides  com- 
plaints. The  qualifications  of  such  a  body  are  the 
exact  opposite  of  the  other.  ...  I  very  much  doubt 
whether  the  same  body  can  properly  discharge  both 
these  functions.  In  the  end  it  will  either  become 
remiss  in  its  executive  duties  or  will,  in  the  zeal  of 
those,  become  unfit  for  the  dispassionate  performance 
of  its  judicial  functions. 

He  therefore  advocated  relieving  the  Commis- 
sion of  all  its  duties  except  the  determination  and 
fixing  of  reasonable  rates. 

The  federal  bureau  of  corporations  has  been  cre- 
ated to  collect  and  furnish  to  Congress  and  the 
executive  departments  information  about  corpora- 
tions engaged  in  interstate  commerce  which  may 

243 


THK    AMERICAN    TRANSPORTATION    QUESTION 

be  useful  in  framing  and  enforcing  laws  for  their 
regulation.  It  could  i)erform  the  same  duty  with 
respect  to  interstate  railways  better  than  can  the 
Interstate  Commerce  Commission.  The  federal 
department  of  justice  exists  solely  to  enforce  the 
federal  laws.  It  could  perform  this  duty  with  re- 
spect to  the  railways  better  than  can  the  Commis- 
sion. It  would,  therefore,  be  natural  and  logical  to 
transfer  these  duties  to  the  bureau  of  corporations 
and  the  department  of  justice.  This  would  relieve 
the  Commission  of  many  of  the  tasks  which  have 
been  heaped  upon  it  in  such  numbers  that  it  has 
become  hard  for  its  members,  however  zealous  and 
laborious,  to  carry  them.  It  would  give  it  more 
time  for  its  vitally  important  duty  of  regulating 
rates.  It  would  remove  it  from  an  atmosphere  in 
which  it  is  impossible  for  it  to  keep  its  mind  entire- 
ly clear  of  prejudice  and  bias.  It  would  not  only 
tend  to  keep  the  Commission  impartial,  but  it 
would  tend  to  keep  railway  men  from  thinking  it 
is  not  so;  those  who  have  just  smarted,  whether 
rightly  or  wrongly,  at  the  hands  of  a  prosecutor 
cannot,  if  at  the  next  minute  haled  before  him  in 
the  role  of  a  judge,  think  him  unbiased  in  his  at- 
titude toward  them.  And  next  to  having  just 
judges  it  is  most  important  to  the  effective  and 
wholesome  application  and  enforcement  of  the 
laws  that  those  within  their  jurisdiction  shall  con- 
sider them  just.  Such  a  change  would  do  much  to 
make  federal  legislation  more  effective,  and  more 

244 


GOVERNMENT   REGULATION 

fair  and  salutary;  and  similar  results  would  be 
produced  by  similar  legislation  with  respect  to  the 
state  railway  commissions/ 


'  It  may,  perhaps,  be  said  that  a  step  toward  separating 
the  executive  and  judicial  functions  heretofore  belonging 
to  the  Interstate  Commerce  Commission  was  taken  by  the 
creation  of  the  Commerce  Court.  But  the  Commerce  Court 
has  not  been  given  any  of  the  duties  heretofore  performed 
by  the  Commission.  It  simply  has  been  substituted  for  the 
United  States  Circuit  Courts  as  the  body  to  which  appeals 
shall  be  made  in  certain  cases — mainly  rate  cases — from  the 
Commission.  Its  creation  does  not  even  seem  adapted  to 
make  regulation  much,  if  any,  more  expert.  Its  members 
are  to  serve  only  for  a  maximum  period  of  five  years,  after 
which  they  must  be  transferred  to  the  regular  circuit  bench. 
This  is  not  long  enough  to  get  an  expert  knowledge  of  rail- 
way affairs.  Under  the  laws  as  they  now  stand,  however, 
appeals  to  the  Commerce  Court  may  involve  mainly  ques- 
tions of  law.  The  Commission's  findings  of  fact  may  usually 
be  accepted  as  final.  The  Commission  has  somewhat  the 
same  relation  to  the  Commerce  Court  that  a  jury  has  to  a 
court  of  equity  which  refers  to  it  questions  of  fact  for  deter- 
mination. That  the  Commission  is  concerned  mainly  with 
the  determination  of  facts  does  not,  however,  make  it  any 
less  necessary  that  it  should  be  impartial.  We  do  not  think 
that  because  juries  deal  only  with  questions  of  fact  it  is 
less  necessary  that  they  should  be  impartial  than  it  is  that 
the  judges  should  be. 


17 


CHAPTER  XII 

GOVERNMENT   REGULATION:    UNDERLYING 
PRINCIPLES 

The  exact  matters  to  which  government  regula- 
tion should  relate,  and  the  exact  form  regulation 
of  each  matter  should  take,  are  very  difficult  ques- 
tions. There  are,  however,  certain  underlying 
principles  whose  soundness  is  not  successfully  im- 
peached because  nowadays  they  are  apt  to  be 
more  honored  in  the  breach  than  in  the  observance. 
One  of  these  is  that  the  sole  proper  aim  of  regula- 
tion is  the  promotion  of  the  public  welfare — the 
furtherance  permanently  of  "the  greatest  good  of 
the  greatest  number."  Sometimes  regulation  has 
the  direct  effect  of  benefiting  some  particular 
class;  as  railway  employees,  by  limiting  the  num- 
ber of  hours  a  day  they  may  be  required  to  work; 
or  shippers,  by  reducing  the  rates  that  they  must 
pay;  or  railways  themselves,  by  prohibiting  the 
giving  or  receiving  of  rebates.  If  the  benefit  con- 
ferred on  the  special  class  is  not  the  only  end  at- 
tained, but  is  merely  incidental  to  the  seeking 
and  attaining  of  some  object  beneficial  to  the  pub- 
lic as  a  whole,  the  regulation  is  just  and  proper. 
But  if  the  only  effect  of  a  particular  regulation  is 

246 


GOVERNMENT    REGULATION:    PRINCIPLES 

to  benefit  one  class  at  the  expense  of  another,  or 
at  the  cost  of  the  public,  it  is  entirely  unjustifiable. 
If  any  species  of  regulation  will  benefit  the  public 
in  the  long  run  it  ought  to  be  adopted  no  matter 
what  class  it  will  hurt.  If  it  will  not  benefit  the 
public  in  the  long  run  it  ought  not  to  be  adopted 
no  matter  what  class  it  will  help. 

We  have  had  much  discussion  of  the  extent  of 
the  power  to  regulate,  and  many  seem  to  think 
that  if  it  can  be  shown  that  any  measure  proposed 
is  within  the  limits  of  national  or  state  authority 
that  is  sufl^cient  reason  for  its  enactment.  But 
whether  the  government  has  the  power  to  do  a 
particular  thing,  and  whether  the  power's  exer- 
cise will  benefit  the  public,  are  two  different  ques- 
tions. If  the  federal  and  state  Constitutions  have 
withheld  from  Congress  and  the  legislatures  any 
powers  that  ought  to  be  exercised  for  the  public 
benefit,  whether  for  the  regulation  of  railways  or 
any  other  purpose,  they  ought  to  be  amended ;  and 
if  the  Constitutions  have  granted  any  powers 
whose  exercise  would  not  be  for  the  benefit  of  the 
public  those  powers  ought  to  be  left  dormant. 
Congress  and  the  legislatures  could  levy  heavier 
taxes  than  they  do.  The  power  to  tax  is  practi- 
cally unlimited.  That  is  not  considered  sufl^cient 
reason  for  exercising  it  without  limitation. 

Another  principle  of  great  importance  is  that 
generally  government  regulation  of  business  should 
prescribe  the  ends  to  be  attained,   but  not  the 

247 


THE    AMERICAN    TRANSPORTATION    QUESTION 

means  by  which  they  shall  be  attained.  Public 
authorities  are  the  most  competent  to  say  what  re- 
sults railways,  for  example,  should  secure  for  the 
public.  They  are  seldom  so  competent  as  the  men 
actively  engaged  in  the  business  to  say  how  those 
results  should  be  secured.  Public  regulation  should 
be  supervisory,  not  managerial.  Its  function  is  to 
see  that  the  directors  and  officers  do  their  duty, 
not  to  supplant  them  in  doing  it.  The  Interstate 
Commerce  Commission,  composed  of  seven  men, 
can  exercise  effective  and  salutary  supervision  of 
railw^ay  management.  But  if  its  members,  either 
because  of  greed  for  power  or  of  requirements  of 
the  law,  seek  to  constitute  themselves  the  general 
managers  and  traffic  managers  of  all  the  railways, 
the  railways  will  be  neither  well  regulated  nor 
well  managed,  nor  the  public  well  served. 

The  railways  will  not  be  well  regulated  because 
the  regulating  authorities  will  neglect  their  proper 
regulating  function;  and  they  will  not  be  well 
managed  because  the  managers  will  be  engaged  in 
scuffling  with  the  public  authorities  or  carrying 
out  their  orders  instead  of  devising  and  carrying 
out  new  methods  for  developing  traffic  or  increas- 
ing efficiency.  I  am  unable  to  believe  that  any 
seven  men,  however  able  and  how^ever  clothed 
with  statutory  power — especially  if  they  lack  rail- 
way experience— can  bring  about  as  great  im- 
provements in  railway  operation  as  can  all  the 
railway  managers  and  owners  of  the  United  States, 

1^48 


GOVERNMENT    REGULATION:    PRINCIPLES 

if  left  a  free  hand,  and  the  stimulus  of  the  hope 
and  expectation  of  gain. 

Again,  there  are  many  things  which  railways, 
like  all  other  persons,  ought  to  do,  but  which  they 
ought  not  to  be  required  by  law  to  do.  The  lim- 
its of  wise  public  policy  are  not  coincident  with, 
but  much  narrower  than,  the  limits  of  individual, 
or  even  corporate,  moral  duty.  Anglo-Saxon  gov- 
ernments have  acted  on  the  principle  that  it  is 
safer  to  allow  too  much  liberty  than  to  impose  too 
much  restraint;  and  it  is  still  as  true  as  ever  that 
there  are  many  things  that  cannot  be  accomplished 
by  law,  and  many  others  which  can  be  accom- 
plished but  not  without  causing  more  evils  than 
are  cured. 

The  regulating  laws  should  be  clear,  specific, 
consistent,  mandatory.  By  "mandatory"  is  meant 
that  they  should  imperatively  require  to  be  done 
just  what  it  is  intended  shall  be  done.  Adminis- 
trative officers  should  be  given  little  or  no  discre- 
tion to  enforce  or  not  enforce  them.  The  Hep- 
burn bill  introduced  in  Congress  in  1908  to  amend 
the  Sherman  Antitrust  law  was  typical  of  a  class 
of  measures  which  are  becoming  more  and  more 
common  and  which  are  the  very  kind  that  ought 
not  to  be  passed.  It  provided  that  a  railway  which 
was  a  party  to  any  agreement  or  combination  with 
competing  lines  might  file  its  terms  with  the  In- 
terstate Commerce  Commission,  and  that  body 
should   determine    by    in^^-^-^etion   of    the    papers 

249 


THE    AMERICAN    TRANSPORTATION    QUESTION 

whether  the  combination  was  reasonable  or  not, 
and,  in  its  discretion,  grant  or  deny  the  railway 
immunity  from  prosecution.  As  Judge  Cooleyhas 
said:' 

Security  can  only  come  from  fixed  rules  which  the 
people,  as  they  become  familiar  with  them,  will  habit- 
ually respect  and  observe;  it  cannot  come  from  judg- 
ments which  are  directed  by  the  individual  will  alone, 
every  one  of  which  must  stand  by  itself  on  its  own 
reasons,  must  be  submitted  to  without  question,  and 
will  be  attributed  to  good  motives  or  bad,  to  wisdom 
or  malice,  to  judgment  or  passion,  according  to  the 
views  which  are  held  by  the  people  or  by  individuals 
concerning  the  ruler  who  gives  it. 

Administrative  discretion  is  arbitrary  discre- 
tion, and  arbitrary  discretion  will  be  used,  when 
public  sentiment  is  hostile  to  an  industry,  to  pur- 
sue it  harshly  and  oppressively,  and  when  public 
sentiment  is  friendly  to  it,  to  enforce  the  laws 
laxly  and  foster  all  manner  of  abuses. 

It  is  comparatively  easy  to  formulate  correct 
general  principles.  It  is  harder  to  apply  them  to 
specific  questions  of  policy.  But  their  correct  ap- 
plication and  carrying  out  are  much  more  impor- 
tant than  their  formulation.  In  previous  chapters 
I  have  touched  on  regulation  of  various  matters. 
No  doubt,  regulation  should  relate — as  already  it 
generally  does  relate — to  three  broad  phases  of  the 

'Cooley  on  "Torts,"  page  10. 
250 


GOVERNMENT    REGULATION:    PRINCIPLES 

railway  business:  (1)  rates,  (2)  finances,  and  (3) 
operation. 

1.  REGULATION    OF   RATES 

Methods  of  regulating  rates  vary  widely.  (1.) 
The  state  legislatures  sometimes  fix  maximum 
schedules  for  all  the  traflfic  in  the  state.  (2.)  Some 
state  commissions  fix  maximum  rates  for  part  or 
all  of  the  state  traffic.  (3. )  The  interstate  and  some 
state  commissions  may  either  on  their  own  motion 
or  on  complaint  restrain  advances  in  rates  pending 
investigation,  and  after  public  hearing  enjoin  ad- 
vances or  require  reductions.  (4.)  The  commis- 
sions of  some  states  can  take  action  regarding 
rates  only  after  formal  complaint  and  hearing. 
(5.)  In  some  states  the  commissions  can  only 
investigate  rates  and  recommend  changes;  they 
cannot  issue  and  enforce  orders  regarding  them. 

The  question,  whether  the  entire  power  of  mak- 
ing rates  should  be  given  to  the  Interstate  Com- 
mission, or  their  initiation  should  be  left  with  the 
railways,  the  Commission  being  given  authority 
only  to  correct  the  traffic  manager's  mistakes 
where  his  judgment  goes  wrong  or  he  is  prompted 
by  bad  motives,  was  discussed  fully  when  the 
Hepburn  act  was  pending.  Public  sentiment  and 
Congress  decided  that  the  initiative  should  be  left 
with  the  railways.  This  was  in  accord  with  the 
principle  that  public  regulation  should  be  super- 
visory, not  managerial — that  it  should  prescribe 

251 


THM    AMERICAN    TRANSPORTATION    QUESTION 

the  duties  of  railway  managers  and  hold  them  to 
their  performance,  not  seek  to  perform  them.  It 
is  quite  generally  believed  that  railway  men  are 
ordinarily  best  fitted  by  experience  and  training, 
and  better  situated,  with  their  thorough  knowl- 
edge of  conditions  along  their  lines,  to  say  what 
rates  ought  to  be  and  ought  not  to  be  than  any 
other  persons.  Usually,  also,  they  have  good  rea- 
son for  making  them  fair  and  reasonable;  for  fair 
and  reasonable  rates  foster  commercial  and  indus- 
trial development;  and  this  increases  railway  traf- 
fic and  profits.  Entire  schedules  of  rates  made  by 
legislatures  or  commissions  repeatedly  have  been 
held  unconstitutional  because  the  authorities,  in 
their  zeal  to  get  something  of  importance  done 
quickly,  did  not,  by  patient,  thorough  and  intelli- 
gent investigation,  ascertain  what  would  be  just 
as  between  travelers,  shippers  and  carriers,  and 
fixed  rates  so  low  as  to  be  confiscatory.  In  other 
cases  legislatures  and  commissions  have  made 
rates  which  were  high  enough,  perhaps,  to  be  not 
actually  confiscatory,  but  so  low  as  to  discourage 
railway  development,  and,  therefore,  to  be  inex- 
pedient. 

While  the  Hepburn  act  authorized  the  Interstate 
Commerce  Commission  to  reduce  rates  found  ex- 
cessive or  unfairly  discriminatory,  it  gave  it,  and 
the  law  now  gives  it,  no  power  to  raise  a  rate  that 
is  unfairly  low.  The  Mann-Elkins  act  of  1910  also 
gives  the  Commission  authority,  in  its  discretion, 

252 


GOVERNMENT    REGULATION:    PRINCIPLES 

either  on  its  own  motion  or  on  complaint,  to  sus- 
pend for  four  months  pending  investigation  of  its 
reasonableness,  any  advance  in  interstate  rates, 
and  if  the  investigation  be  not  finished  at  the  end 
of  this  time,  to  suspend  it  for  six  months  more. 
The  practical  effect  is  to  deprive  the  railways  of 
the  initiative  in  advancing  rates.  The  British 
Railway  and  Canal  Commission  some  twenty  years 
ago  was  given  similar  power.  The  result  has  been 
practically  to  prevent  any  advances  since  in  rail- 
way rates  in  England.  W.  M.  Acworth  says  it 
has  also  practically  stopped  reductions. 

It  is  commonly  assumed  that  railway  traffic  man- 
agers are  always  bent  on  maintaining  and  advanc- 
ing rates,  because  high  rates  mean  large  profits, 
and  that,  therefore,  government  regulation  is 
needful  to  keep  rates  low.  This  is  but  partially 
correct.  The  average  rate  per  ton  per  mile  in  the 
United  States  in  1870  was  18.89  mills.  In  1887, 
when  the  Interstate  Commerce  Act  was  passed,  it 
had  been  reduced  to  9.84  mills,  or  52  per  cent. 
Between  1887  and  1906,  the  latter  the  year  the 
Hepburn  act  went  into  effect,  it  declined  from  9.84 
to  7.48  mills,  or  24  per  cent.  Government  regula- 
tion had  almost  no  hand  in  the  great  and  innumer- 
able reductions  prior  to  1887  reflected  in  the  de- 
cline in  the  average  rate.  They  were  made  by  the 
traffic  managers  of  the  railways.  It  had  very  lit- 
tle hand  in  the  great  and  numerous  reductions  in 
the  period  1887  1906.     Practically  all  were  made 

253 


TIIK    AMERICAN    TRANSPORTATION    QUESTION 

by  the  traffic  managers.  The  traffic  managers  vol- 
untarily made  these  reductions  for  two  reasons. 
First,  each  of  them  sought,  by  lowering  his  rates, 
to  capture  business  from  competitors.  Competi- 
tive ratemaking  has  now  been  greatly  reduced — 
although  not  wholly  eliminated — by  railway  com- 
binations and  consolidations,  and  by  legislation 
requiring  the  roads  to  publish  all  their  rates,  and 
to  give  30  days  notice  of  proposed  changes.  The 
second  reason  why  the  traffic  managers  reduced 
rates  was  that  they  hoped  thereby  to  develop  so 
much  additional  traffic  that  the  net  returns  from 
it  on  the  lower  rates  would  exceed  the  net  returns 
from  a  smaller  traffic  on  the  higher  rates.  But  the 
traffic  manager  never  knows  when  he  makes  a  re- 
duction w^hether  the  resulting  increase  in  traffic 
will  be  large  enough  to  enable  him  to  derive  a 
larger  net  return  from  it  than  he  did  from  the 
smaller  traffic  on  the  higher  rate.  If  it  is  not,  the 
reduction  in  the  rate  will  cause  a  loss  instead  of  a 
gain,  and  he  will  desire  to  restore  it.  If  he  knows 
when  the  original  reduction  is  proposed  that  if  it 
turns  out  unprofitably  he  can  later,  if  he  chooses, 
put  the  rate  back  on  the  old  basis,  he  will  make 
the  reduction;  and  if  it  turns  out  to  be  profitable 
the  lower  rate  will,  of  course,  be  permanent.  But 
if  he  knows  that  in  case  the  reduction  does  not 
prove  profitable  he  probably,  when  he  attempts  to 
restore  the  old  rate,  will  encounter  a  restrain- 
ing order,    and  that  to  get  it  restored  he   will 

254 


GOVERNMENT   REGULATION:    PRINCIPLES 

have  to  go  through  months  of  litigation,  which 
may  finally  be  unsuccessful,  he  will  not  make  the 
reduction  unless  he  is  morally  certain  that  it  will 
be  advantageous  to  the  road;  and  this  moral  cer- 
tainty he  seldom  can  have.  Now,  this  is  the  rea- 
son why,  as  Mr.  Ac  worth  says,  the  exercise  of  the 
authority  to  prevent  advances  in  rates  in  England 
has  also  prevented  reductions ;  and  for  this  same 
reason  the  exercise  of  the  same  authority  in  the 
United  States  may  have  the  same  result. 

It  may  be  said  that  if  the  traffic  managers  do 
not  make  the  reductions  they  ought  to,  public  au- 
thorities can  and  will.  But  no  commission  or  leg- 
islature can  constitutionally  reduce  a  rate  to  a 
point  where  it  would  not,  with  present  traffic  be 
reasonably  compensatory;  the  courts,  in  determi- 
ning the  reasonableness  of  rates  fixed  by  public  au- 
thority will,  and,  indeed,  can  take  into  considera- 
tion only  the  volume  of  traffic  moved  in  the  past 
and  at  present;  and  the  most  beneficial  reductions 
are  those  which  are  profitable  to  the  railway  only 
because  they  increase  traffic.  Consequently,  many 
of  those  who  strongly  advocated  giving  the  Com- 
mission power  to  reduce  any  rate  it  found  unrea- 
sonably high,  and  who  would  now  give  it  authority 
also  to  raise  any  rate  that  it  may  find  unreasonably 
low,  still  believe  that,  within  these  limits,  it  would 
be  wise  public  policy  to  leave  to  the  railways  the 
initiative  in  ratemaking. 

The  underlying  principles  of  ratemaking  have 
255 


TIIK    AMERICAN    TRANSPORTATION    QUESTION 

been  discussed  in  the  chapters  on  "Principles  of 
Ratemaking"  and  "Railway  Discrimination." 
The  regulating-  authorities  sometimes  cannot  fix 
rates  in  the  same  way  that  the  traffic  manager 
can.  As  the  Supreme  Court  of  the  United  States 
said  in  one  case: ' 

"What  the  company  may  choose  voluntarily  to 
do  furnishes  no  criterion  for  the  measurement  of 
the  power  of  a  legislature.  Persons  may  voluntar- 
ily contract  to  do  what  no  legislature  would  have 
the  right  to  compel  them  to  do." 

The  traffic  manager  of  a  railway  may  reduce  a 
rate  much  below  what,  with  the  existing  traffic, 
would  be  compensatory  in  the  hope  and  expecta- 
tion that  the  reduction  will  cause  such  an  increase 
in  traffic  as  to  increase  earnings.  As  I  have  al- 
ready pointed  out,  a  commission  or  legislature 
cannot  do  this.  But,  broadly  speaking,  the  prin- 
ciples which  ought  to  guide  the  traffic  manager 
in  making  rates,  are  the  same  that  should  guide 
a  commission  in  regulating  them.  Each  should  fix 
them  with  a  view  to  the  various  conditions  which 
determine  the  cost  of  the  transportation  service  to 
the  carriers  that  render  it  and  its  value  to  those 
that  receive  it.  Any  adjustment  of  rates  that 
would  be  unfair  to  a  shipper  or  a  community  or  to 
the  owners  of  the  railways,  if  made  by  their  traffic 


'  Lake  Shore  &  Michigan  Southern  R.  R.  Co.  vs.  Smith, 

173  U.  S.,  684,  697. 

256 


GOVERNMENT   REGULATION:    PRINCIPLES 

managers,  would  be  equally  unfair  if  made  by 
public  authorities.  It  may  be  that  under  govern- 
ment ownership  it  might  be  equitable  and  desir- 
able in  some  cases  to  make  rates  in  a  different 
way  from  that  in  which  a  fair  and  enlightened 
traffic  manager  will  make  them  under  private 
ownership;  but  so  long  as,  while  the  service  of 
the  railways  is  public,  their  ownership  continues 
to  be  private,  there  can,  it  would  seem,  be  no 
difference  between  the  way  that  a  fair  and 
enlightened  traffic  manager  would  make  rates 
and  the  way  that  a  fair  and  enlightened  com- 
mission would  make  them.  Indeed,  it  is  im- 
possible that  under  public  regulation  there  should 
permanently  obtain  any  substantial  difference  be- 
tween the  way  that  rates  are  made  by  the  traffic 
managers  and  by  public  authority.  For  such  is 
the  relationship  between  and  interdependence  of 
rates,  not  merely  in  the  same  territory,  but  in  all 
parts  of  the  country,  that  a  commission  cannot  es- 
tablish the  rule  according  to  which  a  single  rate 
or  schedule  of  rates  shall  be  made  without  thereby 
establishing  the  rule  according  to  which  innumer- 
able other  rates  which  it  has  not  touched  shall  be 
made ;  and  after  it  has  fixed  a  substantial  number 
of  rates  in  all  parts  of  the  country,  it  has  fixed  the 
basis  on  which  the  vast  majority  of  all  rates  must 
be  made. 


257 


Till]    AMERICAN    TRANSPORTATION    QUESTION 

2.   REGULATION    OF   FINANCES 

The  second  phase  of  the  railway  business  to 
which  regulation  relates  is  finance.  Every  time  a 
rate  is  fixed  by  public  authority,  or  a  law  is  passed, 
or  an  order  issued  by  a  commission,  regulating  the 
operation  of  railways,  their  earnings  are  affected. 
I  have  discussed  in  other  chapters  the  amount  of 
profit  that  they  should  be  allowed  to  earn.  That 
question  should  not  be  determined  with  reference 
solely  to  the  circumstances  that  they  are  public 
service  corporations,  and  exercise  the  power  of 
eminent  domain,  and  that  therefore  the  public  may 
deal  differently  with  them  than  with  concerns  en- 
gaged in  a  private  calling.  It  is  essentially  a  ques- 
tion of  public  expediency.  Railways  compete  in 
the  money  market  with  manufacturing,  mercantile 
and  other  concerns  for  capital.  Capital  is  invested 
where,  with  allowance  for  differences  in  risk,  it 
can  get  the  largest  return.  The  fact  that  a  rail- 
way is  a  public  service  corporation,  and  exercises 
the  power  of  eminent  domain,  adds  nothing  to  its 
credit  when  it  seeks  to  sell  its  bonds  and  stocks. 
The  only  thing  that  influences  the  investor  is  the 
prospect  of  return;  and  if  the  probable  return  in 
any  line  of  business  is  by  public  regulation  or  oth- 
erwise made  less  than  in  other  lines  the  amount  of 
capital  put  into  it  will  be  inadequate. 

Doubtless  there  should  be  some  public  regulation 
of  the  security  issues  of  railways;  but  the  true 

258 


GOVERNMENT   REGULATION:    PRINCIPLES 

ground  for  this  is  not  the  one  usually  advanced. 
It  usually  is  advocated  on  the  theory  that  when 
railways  are  overcapitalized  they  charge  excessive 
rates  in  order  to  earn  dividends  on  their  watered 
stocks.  If  all  the  railways  in  any  section  or  in  the 
country  were  overcapitalized  this  might  be  true; 
but  while  there  are  not  a  few  roads  in  the  United 
States  that  are  overcapitalized  there  are  in  every 
section  more  that  are  not;  and  if  the  overcapital- 
ized roads  raised  their  rates,  while  the  other  roads 
did  not,  they  would  not  increase  their  earnings, 
but  would  drive  business  to  their  competitors,  and 
reduce  them/ 

The  true  justification  of  public  regulation  of 
railroad  securities  is  that  it  is  needed  to  insure 
good  transportation  and  protect  investors.  There 
is  always  danger  that  an  overcapitalized  company, 
to  keep  up  the  price  of  its  securities,  will  pay  out 
in  interest  and  dividends  what  ought  to  be  spent 
in  maintaining  its  property.  The  Interstate  Com- 
merce Commission,  with  authority  given  by  the 
Hepburn  act,  required  the  railroads  to  begin  the 
use,  on  July  1,  1907,  of  a  uniform  system  of  ac- 
counting. In  several  states  similar  accounting 
systems  have  been  prescribed.  These  systems 
may  be  defective  in  details;  but  they  are  a  step  in 
the  right  direction.  To  prevent  railroads  from  be- 
ing loaded  with  debt,  plunged  into  bankruptcy, 


'  "Railroad  Administration,"  by  Ray  Morris,  page  216. 
251) 


THE    AMERICAN    TRANSPORTATION    QUESTION 

and  rendered  incapable  of  performing  properly 
their  duty  to  the  public,  regulation  should, 
perhaps,  be  exercised  in  future  over  their  issues 
of  bonds  and  other  evidences  of  indebtedness. 
It  ought,  if  practicable,  to  be  seen  that  every 
dollar  raised  by  the  sdc  of  either  stocks  or  bonds 
goes  into  the  development  and  improvement  of 
the  property,  and  not  into  the  pocket  of  some  one 
having  no  claim  to  it.  The  looting  of  railroads 
should  be  guarded  against  and  punished  like  the 
looting  of  banks.  Whether  any  steps,  except  those 
necessary  to  accomplish  these  purposes,  should  be 
taken  is  a  question  regarding  which  there  are 
v^ide  differences  of  opinion. 

A  law^  of  Massachusetts  provided  for  fifteen 
years  that  securities  might  not  be  issued  except  at 
their  market  value;  what  this  value  was  being  de- 
termined by  the  State  Railroad  Commission.  Some- 
times after  the  Commission  had  fixed  the  nominal 
market  value  the  actual  market  price  declined  and 
the  road  had  left  a  lot  of  unsalable  securities. 
And  when  the  commissioners  fixed  the  price  at 
which  securities  should  be  sold  it  gave  investors  a 
sort  of  guarantee  of  the  state  that  the  price  fixed 
was  their  value.  The  state  was,  thereby,  it  has 
been  contended,  morally  obligated  to  make  no  re- 
ductions in  rates  that  would  impair  their  value. 

Texas  prohibits  the  issuance  by  any  railway  of 
stocks  and  bonds  of  a  par  value  of  more  than  50 
per  cent,  in  excess  of  the  value  of  its  property  as 

2(;o 


GOVERNMENT   REGULATION:    PRINCIPLES 

determined  by  the  State  Railroad  Commission; 
and  the  commission  has  fixed  the  "true  value"  of 
Texas  roads  at  only  forty-eight  per  cent,  of  their 
capitalization,  and  a  little  less  than  the  amount  of 
their  outstanding  bonds,  thereby  making  the  issue 
of  new  securities  by  some  railways  impossible. 

Railroad  officers  and  competent  students  contend 
that  the  administration  of  these  statutes  has  hin- 
dered railroad  development;'  and  the  legislature 
of  Massachusetts,  in  1908,  amended  the  law  in  that 
state  so  as  to  provide  that  the  stockholders  of 
railways  may  fix  the  price  at  which  the  stock  shall 
be  issued,  and  that  the  Railroad  Commission  may 
refuse  its  approval  only  if  in  its  opinion  "the  price 
fixed  by  the  stockholders  is  so  low  as  to  be  incon- 
sistent with  the  public  interest." 

New  York  and  Wisconsin  have  statutes  giving 
their  state  commissions  power  to  regulate  secu- 
rity issues.  That  of  New  York  provides  that  se- 
curities may  be  issued  only  for  the  acquisition  of 
property,  the  construction  of  new,  or  the  perma- 
nent improvement  of  old,  lines,  or  the  refunding 
of  outstanding  obligations ;  and  permission  to  make 
issues  must  be  secured  from  the  proper  state  pub- 
lic service  commissions. 

Commissioner  Franklin  K.  Lane  of  the  Inter- 
state Commerce  Commission  has  advocated  legis- 
lation by  Congress  (1)  specifying  the  purposes  for 

'  "Railroad  Administration,"  by  Ray  Morris,  page  221. 
18  261 


THE    AMERICAN    TRANSPORTATION    QUESTION 

which  railway  bonds  and  stocks  may  be  issued; 
(2)  requiring  a  majority  of  the  directors  of  a  rail- 
way, when  securities  are  to  be  issued,  to  subscribe 
on  the  corporate  minutes  to  a  full  statement  of  the 
purposes  for  which  the  money  is  to  be  used  and 
send  a  copy  of  the  statement  to  the  Interstate 
Commerce  Commission;  (3)  requiring  the  direc- 
tors to  make  an  annual  sworn  report  to  the  Com- 
mission of  how  securities  were  sold,  the  proceeds 
and  their  use;  and  (4)  making  it  a  criminal  offense 
for  directors  to  issue  securities  for  any  purpose 
not  authorized  by  law,  or  to  spend  money  realized 
from  them  for  any  purpose  but  that  for  which  it 
was  originally  declared  it  was  to  be  raised. 

Probably  the  main  defect  of  much  of  the  past 
legislation  upon  this  subject  has  been  that  in  one 
way  or  another  it  has  divided  the  responsibility 
for  wise  and  honest  financial  management.  The 
directors  of  a  railway  are  its  i-esponsible  mana- 
gers. They  owe  duties  to  both  their  security  hold- 
ers and  the  public.  Their  duty  to  the  public  is  to 
furnish  good  service  at  reasonable  rates.  Their 
duty  to  the  holders  of  their  securities  is  to  get  for 
them  the  largest  return  compatible  with  the  rights 
of  the  public.  Any  law  that  gives  a  railway  com- 
mission power  to  control  the  directors  in  the  issu- 
ance of  securities  transfers  part  of  the  responsi- 
bility for  what  is  done  from  the  directors,  who 
should  know  thoroughly  the  conditions  and  needs 
of  the  corporation,  to  the  commission,  which  must 

262 


GOVERNMENT   REGULATION:    PRINCIPLES 

know  less  about  its  conditions  and  needs.  If  the 
directors  act  unwisely  or  dishonestly,  and  the 
commission — whether  through  ignorance  or  guilty 
knowledge — permits  their  act,  the  directors  can 
defend  themselves  by  saying  the  commission  ap- 
proved. In  this  way  such  legislation  may  be  a 
cloak  for  and  an  incentive  to  corporate  misman- 
agement. If  the  directors  attempt  to  do  some- 
thing that  ought  to  be  done  and  the  commission 
thwarts  them,  stockholders  and  public  are  harmed, 
and  government  regulation  is  discredited. 

It  would  seem  that,  instead  of  thus  dividing  the 
responsibility,  regulatory  legislation  should  fix  it 
upon  the  directors  so  clearly  and  firmly  that  it 
could  not  be  shirked  or  evaded.  Lawyers  know 
best  how  hard  this  is  to  do.  The  statutes  and  re- 
ports are  full  of  laws  and  decisions  of  the  courts 
defining  minutely  the  duties  of  directors  of  cor- 
porations and  the  remedies  of  public  and  stock- 
holders for  their  misfeasances.  But  the  cunning 
of  directors  in  devising  means  of  prostituting  their 
trusteeship  has  constantly  outstripped  the  energy 
and  ingenuity  of  legislatures  and  courts  in  devis- 
ing means  of  preventing,  detecting  and  punishing 
their  offenses.  However,  legislation  by  both  the 
nation  and  the  states,  such  as  is  suggested  by  Mr. 
Lane,  might  usefully  supplement  existing  statutes 
and  decisions  of  the  courts  regarding  the  duties 
and  accountability  of  directors. 

The  fundamental  purpose  of  all  legislation  to 
263 


THE  amp:rican  transportation  question 

control  issues  of  securities  should  be  to  get  all  the 
money  derived  from  them  spent  on  permanent  im- 
provements or  additions  to  the  property.  The 
good  of  the  property  is,  in  the  long  run,  the  good 
of  stockholders,  creditors  and  public.  But  the 
value  of  railway  property,  like  that  of  other  prop- 
erty, is  not  increased  alone  by  expenditures  on  it. 
It  is  increased,  for  example,  by  advances  in  the 
value  of  land  used  for  right  of  vi^ay  and  terminals. 
Should  legislation  such  as  Mr.  Lane  proposes  per- 
mit such  increment  in  the  value  of  railway  prop- 
erty to  be  capitalized?  Under  the  New  York  law 
it  could  not  be.  But  if  railways  are  not  allowed 
to  capitalize  this  increment,  or  to  earn  what  will 
include  a  fair  return  upon  it,  as  well  as  on  their 
cash  investment,  will  they  not  be  put  at  a  disad- 
vantage in  competing  for  new  capital  against  con- 
cerns that  are  allowed  to  capitalize  their  incre- 
ment, and  also  be  denied  their  right,  as  defined  by 
the  Supreme  Court  of  the  United  States,  to  earn 
a  "fair  return"  upon  the  "fair  value"  of  their 
property  ? 

My  own  view  would  be  that,  in  a  broad  way, 
future  legislation  should,  like  the  New  York  law, 
let  only  actual  investment  in  permanent  improve- 
ments or  additions  be  capitalized,  but  that  it  will 
be  desirable  to  allow  railways  to  earn  such  a  re- 
turn on  the  increment  in  value  of  their  real  prop- 
erty as  will  make  investment  in  them  as  attractive 
as  in  other  concerns. 

264 


GOVERNMENT    REGULATION:    PRINCIPLES 

Should  directors  be  allowed  to  invest  money  de- 
rived from  capital  issues  in  stocks  to  get  control 
of  competing  lines?  This  is  a  question  that  legis- 
lation should  definitely  settle.  The  trend  of  eco- 
nomic opinion  is  rather  favorable  to  railway  com- 
bination under  public  control ;  but  public  opinion 
and  existing  laws  are  distinctly  hostile  to  what- 
ever restricts  competition.  The  federal  and  state 
governments  should  either  frankly  permit  com- 
bination or  effectively  condemn  it;  they  should  not 
go  on  ineffectively  prohibiting  it. 

The  proposition  to  make  directors  record  and  re- 
port what  securities  are  to  be  issued  for  is  unas- 
sailable. Stockholders  and  public  have  a  right  to 
know  this.  But  is  it  practicable,  as  Mr.  Lane  sug- 
gests, to  require  the  directors  to  spend  money  only 
for  the  purpose  originally  stated?  Directors  are 
not  omniscient.  Sometimes  they  might  honestly 
raise  more  money  for  some  purpose  than  proved  to 
be  needed;  sometimes  they  might  need  immedi- 
ately to  spend  money  for  capital  account  that  they 
could  not  get  promptly.  In  the  former  case  they 
would  have  raised  money  that  they  could  never 
spend  for  any  purpose.  In  the  latter  they  would 
need  money  that  they  could  not  raise. 

The  plan  should  be  broadened  to  take  in  such 
cases.  Probably  it  should  be  amended  to  provide 
that  if  the  directors  raised  more  money  for  any 
purpose  than  proved  to  be  required,  or  needed  for 
some  immediate  purpose  capital  that  had  not  been 

265 


Till-;    AMIORICAN    TRANSPORTATION    QUESTION 

raised  for  that  purpose,  they  might,  with  the  ap- 
proval of  the  proper  state,  or  the  Interstate,  Com- 
mission, apply  receipts  from  securities  to  objects 
for  which  the  securities  were  not  issued. 

As  already  said,  the  main  aim  of  legislation 
should  be  to  compel  every  dollar  derived  from  se- 
curities to  be  honestly  spent  in  construction,  addi- 
tions and  improvements.  The  best  means  to  this 
end  is  to  define  the  duties  of  directors  in  this  re- 
gard and  to  provide  for  such  publicity  for  their 
acts  and  such  penalties  for  violations  of  the  law 
that  evasion  of  their  proper  accountability  will  be 
practically  impossible. 

Under  the  proposed  legislation  they  would  have 
to  give  publicity  to  their  acts  themselves,  and  if 
they  made  false  statements  the  special  examiners 
of  the  Interstate  Commerce  Commission,  who  have 
lawful  access  to  all  railway  books  and  papers  at 
any  time,  would  probably  detect  the  fact,  and  both 
publicity  and  punishment  would  follow. 

The  proposed  legislation  probably  will  be  criti- 
cised because  it  would  not  prohibit  the  sale  of  new 
stocks  and  bonds  below  par.  But  such  a  prohibi- 
tion by  the  nation,  or  by  the  less  developed  states, 
would  be  a  serious  obstacle  to  the  construction  of 
new  lines  by  any  but  established  railways.  New 
independent  lines  seldom  or  never  pay  at  first. 
By  buying  their  securities  below  par  investors  dis- 
count the  losses  they  anticipate  during  the  youth 
of  the  enterprise.     If  the  securities  could  not  be 

26G 


GOVERNMENT   REGULATION:    PRINCIPLES 

sold  at  a  discount  they  usually  could  not  be  sold  at 
all.  If,  after  every  dollar  derived  from  them  has 
been  honestly  spent  in  construction  and  additions, 
securities  of  new  lines  sold  below  par  shall  rise  in 
value  to  par  or  higher,  the  owners  probably  will  be 
no  more  than  compensated  for  the  risk  taken  and 
the  early  losses  suffered.  As  for  the  old,  prosper- 
ous roads,  there  would  be  little  incentive  to  water- 
ing their  stock  if  it  were  known  that  every  dollar 
realized  from  the  added  securities  would  have  to 
be  spent  on  the  property.^ 


'The  Railroad  Securities  Commission,  whose  report  to 
President  Taft  was  made  public  after  the  text  was  put  in 
type,  favored  a  policy  in  dealing-  with  the  issuance  of  rail- 
way bonds  and  stocks  similar  to,  although  more  conservative 
than,  that  I  have  advocated.  As  the  Commission  said: 
"Many,  if  not  most,  of  the  abuses  connected  with  railroad 
securities  arise  out  of  an  almost  universal  failure  to  recog- 
nize distinctions  which  exist  and  should  exist  between  bonds 
and  stocks.  A  bond  is  an  obligation  to  pay  a  fixed  sum  of 
money  at  a  stated  time.  A  stock  certificate  is  merely  the 
evidence  of  ownership  of  a  share  in  the  property,  profits  and 
risks  of  a  corporation.  .  .  .  The  real  value  of  the  stock 
certificate  depends  upon  the  manner  in  which  the  money 
has  been  invested."  The  Commission,  therefore,  expressed 
itself  as  "of  the  opinion  that  it  is  far  more  important  to 
ascertain  just  what  are  the  facts  connected  with  the  issue 
of  securities  and  what  is  actually  done  with  whatever 
money  has  in  fact  been  realized  from  the  stock  which  is 
issued,  than  merely  to  make  sure  that  the  par  value  of  the 
stock  was  paid  in  at  the  time  of  issue."  The  Commission 
said  that  if  rates  were  to  be  materially  influenced  by  the 
amount  of  the  outstanding  securities  it  would  be  desirable 
for  securities  to  be  issued  under  governmental  regulation, 

267 


THE    AMERICAN    TRANSPORTATION    QUESTION 

•  3.   REGULATION    OF   OPERATION 

Railway  managers  sometimes  have  protested 
against  public  interference  with  the  physical  oper- 
ation of  the  roads.  Regulation  of  physical  opera- 
tion is  perhaps  more  desirable  and  justifiable  than 
any  other  kind.  The  primary  duty  of  public  car- 
riers is  to  furnish  safe  and  adequate  transporta- 

but  it  believed  "that  the  amount  and  face  value  of  out- 
standing securities  has  only  an  indirect  influence  on  the 
making  of  rates,  and  that  it  should  have  little  if  any  weight 
in  their  regulation."  "If,"  the  Commission  added,  "rail- 
road securities  w^ere  to  be  issued  only  after  express  authori- 
zation of  each  particular  issue  by  the  Interstate  Commerce 
Commission  or  other  governmental  agency,  it  is  difficult  to 
see  how  the  government  could  thereafter  escape  the  moral, 
if  not  the  legal,  obligation  to  recognize  these  securities  in 
the  regulation  of  railroad  rates, "  and  "the  possible  con- 
sequences of  such  a  system  are  too  serious  to  warrant  its 
adoption  at  the  present  time."  The  Commission,  therefore, 
confined  itself  to  recommending  legislation  to  require  each 
railway  corporation  to  file  with  the  Interstate  Commerce 
Commission  prior  to  the  date  of  issuance  of  any  securities  a 
full  statement  of  their  character  and  amount;  to  furnish  to 
the  Commission  at  such  times  as  it  may  require  full  state- 
ments of  its  financial  transactions  which  the  Commission 
may  make  public  at  its  discretion;  and  to  compile,  for  the 
information  of  its  stockholders,  such  information  and  in  such 
form  as  the  Commission  may  require  regarding  its  financial 
transactions  during  the  fiscal  year,  and  any  interests  that  its 
directors  may  have  had  in  any  transaction  under  investiga- 
tion ;  these  provisions  to  be  enforced  by  the  Interstate  Com- 
merce Commission  under  appropriate  penalties  to  be  fixed 
by  the  proposed  legislation,  including  fine  and  imprison- 
ment. 

268 


GOVERNMENT    REGULATION:    PRINCIPLES 

tion.  When  they  do  not  it  is  a  proper  function  of 
government  to  require  it.  Now,  however  good  the 
transportation  furnished  by  many  American  rail- 
ways may  be— and  some  of  them  furnish  the  best 
in  the  world — their  service,  taking  them  as  a 
whole,  is  not  as  safe  as  it  should  be,  and  often  has 
not  been  adequate.  It  is  usually  to  their  plain  in- 
terest to  make  their  facilities  adequate;  without 
doing  so  they  cannot  handle  the  maximum  avail- 
able business;  and  without  handling  it  they  can- 
not earn  the  maximum  net  return.  Legislation  to 
punish  people  for  not  doing  what  it  is  to  their  self- 
ish interest  to  do,  and  what  they  are  already 
straining  every  nerve  to  do,  is  futile  or  harmful. 
Of  this  class  are  the  so-called  "reciprocal  demur- 
rage" regulations  adopted  in  1907  by  several 
states.  Business  had  outgrown  facilities  of  trans- 
portation despite  herculean  efforts  by  railway  man- 
agements. These  states  in  their  wisdom  fixed 
penalties  to  be  imposed  on  the  roads  for  not  fur- 
nishing needed  cars,  which  did  not  then  exist,  but 
which  had  been  ordered.  By  the  time  the  cars 
were  built  traffic  had  slumped  enormously,  and 
from  January  to  August,  1908,  from  200,000  to 
400,000  idle  freight  cars  stood  upon  side  tracks. 
No  wise  legislature  or  commission  required  the 
shippers  to  provide  freight  to  load  these  idle  cars ; 
yet  it  would  be  just  as  sensible  to  require  shippers 
to  furnish  freight  for  idle  cars  when  the  freight 
does  not  exist  as  to  require  the  railways  to  fur- 

269 


TIIH    AMERICAN    TRANSPORTATION    QUESTION 

nish  cars  to  move  freight  when  the  cars  do  not 
exist. 

Regulation  has  no  more  important  function  than 
that  of  making  railway  operation  safe.  The  acci- 
dent record  is  the  worst  feature  of  railway  opera- 
tion in  the  United  States.  Public  regulation  to 
reduce  it  is  entirely  justified.  But  knowledge  of 
the  causes  of  accidents  is  prerequisite  to  adopting 
the  best  means  for  stopping  them;  and  the  na- 
tional and  state  governments  have  done  little  to 
get  it.  The  railways  are  required  to  report  all  ac- 
cidents to  the  Interstate  Commerce  Commission, 
and  its  statistics  are  very  complete.  But  the  state- 
ment that  a  wreck  in  which  twenty-five  people  were 
killed  was  due  to  a  "butting  collision"  is  not  very 
enlightening.  The  thing  needful  to  know  in  order 
to  stop  wrecks  is  not  that  they  occur,  but  ivhyt]\Qy 
occur.  Are  they  due  to  defects  in  the  rules  or 
equipment  of  the  companies  or  to  disregard  or 
violation  of  rules  by  employees?  The  railway 
company  will  naturally  blame  the  employees  if  it 
can;  and  employees  just  as  naturally  will  blame 
the'company  if  they  can.  The  only  way  to  get  at 
the  truth  is  through  investigations  by  disinter- 
ested government  employees.  The  Interstate  Com- 
merce Commission,  in  the  administration  of  the 
safety  appliances  laws,  uses  inspectors  whose  duty 
it  is  to  ascertain  if  cars  are  properly  equipped; 
but  as  they  are  all  taken  from  the  ranks  of  the  rail- 
way  labor  brotherhoods,  it  is  charged  that  they 

270 


GOVERNMENT    REGULATION:    PRINCIPLES 

cannot  be  relied  on  for  reports  impartial  as  between 
employees  and  employers.'  The  British  Board  of 
Trade  uses  army  officers  as  investigators ;  and  their 
thorough  and  unbiased  reports  and  intelligent  rec- 
ommendations have  done  much  to  make  the  acci- 
dent record  of  British  railways  the  envy  of  the 
world. 

The  true  causes  of  accidents  being  ascertained, 
the  state  and  federal  governments  can  take  salu- 
tary action  to  reduce  them.  The  federal  statutes 
already  contain  laws  intended  to  promote  safety 
which  illustrate  both  the  right  and  the  wrong  kind 
of  legislation.  In  1893  Congress  passed  the  orig- 
inal safety  appliances  act.  It  authorized  the 
American  Railway  Association  to  designate  to  the 
Interstate  Commission  the  standards  of  safety  ap- 
pliances to  be  used,  and  prohibited  any  railway 
engaged  in  interstate  commerce  to  use  after  Janu- 
ary 1,  1898,  any  cars  or  engines  not  properly 
equipped.  This,  it  will  be  seen,  put  upon  the  rail- 
ways themselves  the  duty  of  providing  safe  equip- 
ment. The  Master  Car  Builders'  Association,  an 
organization  composed  of  railway  officers,  working 
in  accordance  with  the  spirit  of  the  law,  from 
year  to  year  devised  better  and  better  standards 
which  were  adopted  by  most  of  the  roads;  and 
now  practically  all  of  the  engines  and  cars  on 


'  There  is  much  complaint  from  railway  officers  that  their 
reports  often  are  very  far  from  impartial. 

271 


THE    AMERICAN    TRANSPORTATION    QUESTION 

American  railways  are  equipped  with  good  safety 
appliances.  In  1910  Congress  amended  the  law, 
taking  the  determination  of  the  appliances  to  be 
used  out  of  the  hands  of  the  railways  and  putting 
it  entirely  in  those  of  the  Commission.  It  is  pos- 
sible that  the  Master  Car  Builders'  Association 
will  now  discontinue  its  work  of  studying  and  im- 
proving the  standards.  If  so,  this  new  federal 
regulation  will  prove  immediately  beneficial,  and 
in  the  long  run  very  hannful. 

Perhaps  Congress  should  pass  a  law  requiring  the 
installation  of  the  block  signal  system — that  is,  the 
system  of  maintaining  a  space  interval  between 
trains — on  all  the  railways  of  the  United  States. 
Such  legislation  should  not,  however,  prescribe  the 
kind  of  signaling  system  to  be  used  on  all  roads, 
or  on  any;  for  the  specific  kind  of  system  that 
should  be  used  on  any  road  depends  entirely  on  its 
operating  conditions;  and  therefore  the  officers  of 
each  are  best  qualified  to  determine  what  kind  of 
signal  system  is  best  adapted  to  its  needs. 

A  good  deal  of  the  legislation  regarding  railway 
operation  that  is  being  passed  violates  every  sound 
principle.  This  is  true,  for  example,  of  the  laws 
fixing  the  number  of  men  that  shall  be  employed 
in  train  crews.  They  originate  with  representa- 
tives of  the  railway  brotherhoods;  they  are  not 
intended  or  adapted  in  any  degree  whatsoever  to 
promote  the  public  welfare,  but  are  designed  to 
increase  the   number  of  men  that  the  railways 

272 


GOVERNMENT    REGULATION:    PRINCIPLES 

must  employ;  and  their  effect  is  directly  to  in- 
crease the  cost  of  transportation  to  the  railway 
and  indirectly  to  increase  its  cost  to  the  public. 

An  example  of  the  right  kind  of  regulation  of 
operation  is  the  law  regarding  the  inspection  of 
locomotive  boilers  passed  by  Congress  in  1911.  It 
does  not  prescribe  in  detail  how  boilers  shall  be 
built  and  kept  in  good  condition.  It  forbids  the 
railways  to  use  locomotives  unless  the  boilers  and 
appurtenances  thereof  are  in  proper  condition  and 
safe  to  operate,  and  unless  they  shall  be  inspected 
from  time  to  time  in  accordance  with  the  pro- 
visions of  the  act.  The  inspections  are  to  be  made 
primarily  by  the  railways  in  accordance  with  rules 
and  instructions  prepared  in  the  first  instance  by 
themselves,  but  a  government  chief  inspector,  two 
assistant  chief  inspectors  and  fifty  district  inspec- 
tors are  regularly  to  check  up  the  roads,  and  the 
Interstate  Commerce  Commission  is  given  author- 
ity to  exercise  general  supervision  over  the  carriers 
to  see  that  the  duty  of  keeping  boilers  safe,  which 
is  primarily  imposed  on  them,  is  performed. 

Laws  have  been  passed  within  recent  years  by 
the  nation  and  some  of  the  states  to  regulate  the 
hours  of  service  of  railway  employees.  The  pro- 
hibition by  the  federal  government  of  trainmen 
being  kept  on  duty  continuously  for  more  than  six- 
teen hours,  by  a  law  passed  in  1907,  was  justified; 
but  the  insertion  in  the  same  act  of  a  provision 
prohibiting   any   telegraph   operator   from   being 

273 


THE    AMERICAN    TRANSPORTATION    QUESTION 

kept  on  duty  for  over  nine  hours  was  absurdly  in- 
consistent. It  makes  a  discrimination  between 
telegraph  operators  and  trainmen  that  is  based  on 
no  rational  ground.  Nine  hours,  or  even  eight 
hours  are  as  many  as  telegraphers  employed  in 
dispatching  trains  at  busy  division  offices  should 
be  kept  on  duty.  But  a  provision  which  applies 
the  same  rule  to  station  agents  in  small  towns  who 
happen  also  to  perform  the  duties  of  telegraph 
operators,  but  who  are  not  engaged  in  telegraph 
work  more  than  a  total  of  more  than  two  or  three 
hours  a  day,  is  not  regulation  in  the  interest  of 
public  safety,  and  is  just  as  justifiable,  and  no 
more,  as  regulation  to  limit  similarly  the  hours  of 
service  in  banks  or  stores. 

Very  different  in  their  nature  and  effects  are  the 
laws  and  ordinances  that  have  been  passed  by 
some  states  and  cities  to  require  the  elevation  of 
tracks  so  as  to  abolish  crossings  at  grades  between 
different  railways,  and  between  railways  and  high- 
ways. Such  legislation  is  in  the  interest  of  pub- 
lic safety,  and  should  be  enacted  and  enforced  un- 
til, in  due  time,  every  grade  crossing  in  the 
country  shall  be  abolished.  Inasmuch,  however, 
as  highways  have  been  built  over  railways  as  of- 
ten as  railways  have  been  over  highways,  it  does 
not  seem  fair  to  make  the  railways  bear  all  the 
expense. 

A  number  of  states  have  passed  laws  to  require 
the  use  of  locomotive  headlights  having  such  great 

274 


GOVERNMENT   REGULATION:    PRINCIPLES 

power  that  only  electric  headlights  will  meet  the 
requirements.  Professor  C.  H.  Benjamin,  of  Pur- 
due University,  as  a  result  of  an  investigation  he 
made,  contends  that  the  use  of  high-power  head- 
lights on  lines  where  there  are  block  signals,  tends 
to  prevent  engineers  from  properly  reading  the 
signals  and  increases  the  danger  of  accident.  On 
the  other  hand,  other  experts  and  many  railway 
officers  believe  that  high-power  headlights  pro- 
mote safety  both  on  roads  having  block  signals 
and  on  those  not  having  them.  The  fact  that  ex- 
perts so  entirely  disagree  shows  conclusively  that 
no  legislation  should  be  passed  regarding  the  use 
of  high-power  headlights.  In  the  State  of  South 
Dakota,  in  1910,  the  question  of  whether  railways 
should  be  required  to  use  electric  headlights  was 
submitted  to  a  referendum  vote  of  the  people! 
The  people,  wiser  than  the  legislators,  refused  to 
pass  the  law.  The  fact  that  such  a  measure  could 
be  submitted  to  a  referendum  vote  illustrates  the 
absurd  lengths  to  which  regulation  of  railways  is 
sometimes  carried. 

A  good  many  laws  are  being  passed  which  re- 
quire the  doing  of  things  which  perhaps  ought  to 
be  done,  but  which  ought  not  to  be  required  by 
law  to  be  done,  because  the  matters  with  which 
they  deal  are  of  such  little  public  moment  that  the 
doing  or  not  doing  of  them  should  be  left  to  the 
discretion  of  railway  officers.  The  laws  passed  by 
the  state  legislatures  in  the  spring  of  1911  contain 

275 


THE    AMERICAN    TRANSPORTATION    QUESTION 

provisions,  for  example,  regarding  not  only  the 
number  of  men  that  must  be  employed  in  train 
crews,  but  also  regarding  the  railway  experience 
employees  must  have  had.  The  purpose  of  this  is 
to  strengthen  the  labor  monopolies  of  the  railway 
unions  and  embarrass  the  railway  managements  in 
case  of  strikes.  Other  provisions  relate  to  the 
number  of  hours  per  day  that  railway  employees 
may  be  required  to  work ;  the  kind  of  letters  of 
recommendation  they  shall  be  given  when  they 
quit  or  are  discharged;  the  sort  of  uniforms  they 
may  be  required  to  wear;  the  kind  of  cabooses  the 
railways  shall  use ;  the  way  they  shall  inspect  their 
boilers;  the  kind  of  headlights  and  safety  appli- 
ances on  cars  that  they  shall  use;  the  places  where 
they  shall  stop  their  passenger  trains,  and  the  way 
that  they  shall  equip  them;  the  speed  of  iive-stock 
and  "dead  freight"  trains;  the  way  switchlights 
shall  be  set;  the  minimum  clearances  between  cars 
and  structures  near  the  tracks ;  the  kind  of  scales 
that  railways  shall  have  and  the  way  that  they 
shall  weigh  shippers'  goods;  the  way  they  shall 
fence  their  right  of  way  and  burn  weeds  along  it; 
the  way  they  shall  drain  their  roadway;  the  con- 
struction of  double  tracks;  the  equipment  of  sta- 
tions, stock  yards,  shops,  etc.  In  1909  forty-one 
State  Legislatures  passed  664  provisions,  and  in  the 
spring  of  1911  forty  State  Legislatures  passed  276 
provisions,  affecting  railways.  When  it  is  con- 
sidered that   Congress  and  the   legislatures    had 

276 


GOVERNMENT   REGULATION:    PRINCIPLES 

passed  800  provisions  affecting  railways  in  the  five 
years  1904-1908,  inclusive,  and  that  numerous  such 
laws  have  been  passed  since,  one  is  disposed  to 
wonder  if  there  can  be  many  subjects  pertaining 
to  transportation  left  for  the  lawmakers  to  deal 
with ! 

This  list  of  statutory  provisions  regarding  rail- 
ways recalls  the  striking  language  used  by  the 
German  historian  Von  Hoist  in  describing  the  all- 
pervading  activities  of  government  in  France  just 
prior  to  the  Revolution.  After  referring  to  the 
functions  of  the  controller  general,  who,  he  said, 
was  the  center  around  which  everything  turned, 
he  added : 

What  the  controller  was  for  the  whole  state  the  in- 
tendant  was  for  its  administrative  subdivision — the 
generalite.  He  had  his  hand  in  everything  and  always 
in  the  spirit  of  bustling,  distrustful  and  presumptuous 
paternalism.  .  .  .  Surely  this  government  machinery 
was  simple  enough, — ay,  it  was  of  fearful,  paralyzing, 
nay,  absolutely  killing,  simplicity.  .  .  .  The  capabil- 
ity for  self-government  was  systematically  annihilated. 
And  it  was  done  so  successfully  that  the  people  at  last 
could  not  get  enough  of  this  kind  of  paternalism.  We 
meet  with  bitter  complaints  that,  in  regard  to  one 
thing  or  another,  the  government  had  not  marked  out 
the  way  with  sufficient  clearness  and  strictness.  .  .  . 
As  the  government  charged  itself  with  attending  to 
everything  it  was,  of  course,  also  held  responsible  for 
everything.  Commanding,  instructing,  or  at  least  ad- 
19  277 


THE    AMERICAN    TRANSPORTATION    QUESTION 

vising,  in  regard  to  everything,  was  it  not  also  its 
duty  to  foresee  everything,  up  to  the  fancies  of  fashion, 
the  whims  of  trade,  the  freaks  of  the  weather?  The 
government  became  the  terrestrial  Providence.  One 
of  the  attributes  of  Providence  is  omnipresence.  If 
we  merely  look  at  the  intendants  and  their  subordi- 
nates, who  did  nearly  all  the  real  governing,  we  get 
but  a  very  inadequate  idea  of  how  far  government 
under  the  ancient  regime  came  up  to  this  require- 
ment. .  .  .  There  was  such  an  innumerable  host  of  all 
sorts  of  public  officials  that  one  is  tempted  to  say 
whatever  a  man  did  he  was  almost  as  sure  to  have 
some  kind  of  a  public  functionary  at  his  side  as  he 
was  to  be  followed  by  his  own  shadow.  If  the  peasant 
brought  an  ox  to  market  the  inspector  of  cattle  pre- 
sented himself;  the  inspector  of  calves  looked  after  the 
calves;  the  inspector  of  swine  took  care  of  the  pigs; 
and  if  it  happened  to  be  a  sow  with  young  he  was 
joined  by  the  inspector  of  sucking  pigs.' 

Students  of  history  know  the  great  reaction  that 
took  place  throughout  the  civilized  world  late  in 
the  eighteenth  and  early  in  the  nineteenth  cen- 
tury against  this  sort  of  governmental  paternalism. 
Buckle,  in  his  "History  of  Civilization  in  Eng- 
land," published  in  1857,  expressed  the  prevalent 
view  of  that  period. 

Every  great  reform  which  has  been  effected,  has 
consisted  not  in  doing  something  new,  but  in  undoing 

*  "The  French  Revolution,"  by  Von  Hoist,  Vol.  I,  page  11. 

278 


GOVERNMENT    REGULATION:    PRINCIPLES 

something  old.  The  most  valuable  additions  made  to 
legislation  have  been  enactments  destructive  of  previous 
legislation;  and  the  best  laws  which  have  been  passed 
have  been  those  by  which  former  laws  were  repealed. 
.  .  .  The  whole  scope  and  tendency  of  modern  legisla- 
tion is  to  restore  things  to  that  natural  channel  from 
which  the  ignorance  of  preceding  legislators  has  driven 
them.  ...  It  is  clear  that  the  progress  of  civilization 
cannot  be  due  to  those  who  on  the  most  important 
subjects  have  done  so  much  harm  that  their  successors 
are  considered  benefactors  simply  because  they  reverse 
their  policy  and  thus  restore  affairs  to  the  state  in 
which  they  would  have  remained  if  politicians  had 
allowed  them  to  run  on  in  the  course  which  the  wants 
of  society  required. 

If  we  carry  government  regulation  of  railways 
and  other  industries  to  an  extreme  the  effects  will 
be  so  evil  that  either  we  will  resort  to  state  social- 
ism, or  another  wave  of  reaction  will  sweep  the 
regulatory  laws,  good  as  well  as  bad,  from  the 
statute  books,  and  some  future  historian  will  say, 
as  Buckle  said,  that  the  most  valuable  additions  to 
the  legislation  of  that  time  are  enactments  destruc- 
tive of  the  legislation  of  our  time. 

"Virtue,"  says  Aristotle,  "is  a  middle  state  be- 
tween two  faulty  states,  in  the  way  of  excess  on 
one  side  and  defect  on  the  other;  and  it  is  so, 
moreover,  because  the  faulty  states  on  one  side 
fall  short  of,  and  those  on  the  other  side  exceed, 
what  is  right.**    To  make  government  regulation 

279 


THE    AMERICAN    TRANSPORTATION    QUESTION 

of  railroads  fair  and  successful,  the  faulty  state 
on  the  side  of  the  reactionary  that  would  fall  short 
of,  and  the  faulty  state  on  the  side  of  the  radical 
that  would  exceed,  what  is  right,  must  equally  be 
avoided.  No  right  of  the  public  should  be  left  un- 
protected. But  no  restriction  or  burden  that  the 
protection  of  the  rights  of  the  public  does  not 
clearly  require  should  be  placed  upon  the  railroad. 


INDEX 


INDEX 


Accidents,  railway,  166. 

at  highway  crossings,  172. 
to  employees,  128,  166. 
to  passengers,  128,  166. 
to  trespassers,  167. 
Act   to   Regulate   Commerce, 
on  discrimination,  46. 
recommendations  for 

amendments  to,  75,76. 
Acworth,   W.  M.,  comparison 
of  American  and  British 
railway       management 
by,  138. 
on   efficiency   of    American 
railways,  142. 
Antitrust  Act,  Sherman,  73. 

Belgium,  costs  of  rail  and 
water  transportation  in, 
197-201. 
length  and  tonnage  of  water- 
ways in,  185. 
traffic  in,  rail  and  water,  in- 
crease of,  185. 

Brandeis,    Louis   D. ,    on  effi- 
ciency of  American  rail- 
ways, 124. 
on   railway  profits  and  effi- 
ciency, 105. 

Buckle,  Henry  Thomas,  on  re- 
lations of  government 
and  business,  278. 

Bulk,  influence  of,  on  rates,  14. 


Capacity  of  freight  cars,  139. 
Capitalization  of  railways,  in 
foreign    countries,    112, 
130. 
in  the  United  States,  com- 
pared  with    their  cost, 
129. 
compared  with  their  valu- 
ation, 113. 
influence  of,  on  rates,  114. 
' '  Charging  what  the  traffic  will 
bear,"  9,  22,  26. 
examples  of,  55. 
Classification,  freight,  14, 
and  discrimination,  47. 
Commerce  Court,  245. 
Commissions,   railroad,  A.   T. 
Hadley    on   powers   of, 
234. 
personnel  of,  235. 
salaries    of  members  of, 
238. 
Competition,   and   discrimina- 
tion, Martin   A.   Knapp 
on,  72. 
between  railways,  58. 
between  railways  and  inland 

waterways,  206. 
between  railways  and  trans- 
oceanic routes,  178. 
influence  of,  on  rates,  28. 
Competitive  traffic,   rates  on, 
9. 


283 


INDEX 


Cooley,    T.   M.,  on  conflict  of   Discrimination,  between  rates 


state  and  interstate  reg- 
ulation, 229. 
Copper,  rates  on,  64. 
Cost,  of  labor  and  of  commodi- 
ties, increases  in,  142. 

of  rail  and  of  water  trans- 
portation, 181. 

of    transportation    on    Erie 
Canal,  201. 

of  transportation  on  foreign 
railways,  197. 
"Cost   of   Service"    in    rate- 
making,  1,  13. 

additional,  6. 

difference     between      addi- 
tional and  average,  16. 

Halford  Erickson  on,  25. 

impossible     to   use    as   sole 
basis  for  rates,  23. 
Cost  accounting,  use  of  ,in  rate- 
making,  17. 

Density  of  traffic, on  railways, 
in  different  sections  of 
the  United  States,  54. 
in    the  United  States  and 
foreign     countries,     12, 
218,  219. 
on  foreign  waterways,  218. 
Depth,    of   American    water- 
ways, 189. 
of  foreign  waterways,  187. 
Discrimination,  Act  to  Regu- 
late Commerce  on,  46. 
between  commodities,  47. 
between    commodities     and 

communities,  42. 
between  communities,  53. 


on  live-stock  and   pack- 
ing-house   products,   50. 

between  shippers,  62. 

by  substitution  of   tonnage 
at  transit  points,  68. 

by  tap  line  allowances,  67. 

caused  by  waterways,  213. 

difference  between  fair  and 
unfair,  42. 

effect  of,  49. 

in  the  railway  and  other  in- 
dustries, 43. 

in  rates  on  copper,  64. 

Martin  A.  Knapp  on,  72. 

remedies  for,  71. 
Distance,  basing  rates  on,  38. 

rates  not  made  in  proportion 
to,  8,  26. 

Economy,   as   related  to  effi- 
ciency, 124. 

of  railway  operation  in  the 
United  States  and  Eu- 
rope, 134. 
Efficiency,  effect  of  regulation 
of  profits  on,  101,  105, 
123. 

from  the  standpoint  of  econ- 
omy, 124. 

from  the  standpoint  of  pub- 
lic service,  153. 

of  railway  employees,  148. 

of  railway  equipment,  138. 
Employees,   accidents  to,  128, 
166. 

efficiency  of,  148. 

number  of,  in  United  States, 
166. 


284 


INDEX 


Equipment,  efficiency  of,  138. 

Erickson,  Halford,  on  cost  of 
service  in  ratemaking, 
25. 

Erie  Canal,  cost  of  transpor- 
tation on,  201. 

"Fair     Return,"      limiting 
earnings  to,  v,  85,  103, 
258. 
Railroad    Securities     Com- 
mission on,  123. 
United  States  Circuit  Judge 
Sanborn  on,  100. 
Finances,  regulation  of,  258. 
Fink,  Albert,  on  variations  in 

cost  of  service,  23. 
Fixed   charges,   contributions 
to,     from     low     grade 
freight,  6. 
France,   average  freight  rate 
in,  12. 
average    haul    per    ton   of 

freight  in,  134. 
average  passenger  rate  in, 

84. 
capitalization  of  railways  in, 

112,  136. 
cost  of  waterways  per  mile 

in,  200. 
density  of  traffic  in,  on  rail- 
ways, 12. 
on  waterways  in,  218. 
freight  hauled  in,  per  dollar 
of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 
length  and  tonnage  of  water- 
ways in,  185. 


France,  operating  expenses 
per  mile  of  road  in, 
136. 

passengers    hauled   in,    per 
dollar  of  capital,  136. 
per    dollar    of   operating 
expenses,  136. 

public  service  rendered  in, 
per  dollar  of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 
Freight,  average  hauls  of,  in 
United  States  and  for- 
eign countries,  134. 

car  capacity  in  Europe  and 
United  States,  138. 

hauled  per  dollar  of  capital 
in  United  States  and 
foreign  countries,  136. 

hauled  per  dollar  of  opera- 
ting expenses  in  United 
States  and  foreign  coun- 
tries, 136. 

rates  per  ton  per  mile  in 
United  States  and  for- 
eign countries,  12,  197. 

trains,  fast,  in  the  United 
States  and  foreign  coun- 
tries, 162. 

Germany,  average  freight 
rate  in,  12. 

average  haul  per  ton  of 
freight  in,  134. 

average  passenger  rate  in, 
84. 

capitalization  (cost  of  con- 
struction) of  railways 
in,  112,  136. 


285 


INDEX 


Germany,  cost  of   waterways 
per  mile  in,  200. 

density  of  traffic  in,  on  rail- 
ways, 12. 
on  waterways,  218. 

freight  hauled  in,  per  dollar 
of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 

length  and  tonnage  of  water- 
ways in,  186,  187. 

operating  expenses  per  mile 
of  road  in,  136. 

passengers    hauled    in,    per 
dollar  of  capital,  136. 
per    dollar    of    operating 
expenses,  136. 

public  service  rendered  in, 
per  dollar  of  capital, 
136. 
per  dollar  of  operating  ex- 
penses, 136. 
Government  regulation,  by 
commissions  or  legisla- 
tures? 232. 

Hadley,  A.  T.,  on,  234. 

of  finances,  258. 

of  operation,  268. 

of  rates,  251. 

state  vs.  federal,  228. 

underlying     principles     of, 
246. 

who  shall  regulate  ?  222. 


Hadley,  A.  T.,  on  "charging   Kaiser  Wilhelm   Canal,   cost 
what    the     traffic    will  of,  201. 


Harrison,  Fairfax,  on  valua- 
tion and  ratemaking, 
116. 

Haul,  freight,  average  per  ton 
in  United  States  and 
foreign    countries,    134. 

Hill,  James  J.,  and  making  of 
Northwestern  lumber 
rates,  30. 

Hoist,  H.  Von,  on  excessive 
government  regulation 
in  France,  277. 

Increasing  returns,  law  of,  6. 
Interstate  commerce,    T.    M. 
Cooley  on  future  of  reg- 
ulation of,  229. 
state  interference  with,  229. 
Judge  W.  H.  Sanborn  on, 
231. 
Interstate  Commerce  Act,  on 
discrimination,  46. 
recommendations  for  amend- 
ment of,  75,  76. 
Interstate  Commerce  Commis- 
sion,   conflicting   duties 
of,  241. 
personnel  of,  239. 
power  needed  by,  to  prevent 
unfair  discrimination, 76. 

Johnson,  Emory  R. ,  on  effects 
of  pooling,  73,  74. 


bear,"  9. 
on   railway   regulation,  vii, 
234. 


Knapp,  Martin  A.,  on  compe- 
tition and  discrimina- 
tion, 72. 


286 


INDEX 


Kruttschnitt,  Julius,  on   rail-    Passenger    rates,    in    foreign 


way  efficiency,  142. 

Labor,  increases  in  wages  of, 

142. 
Long-and-shorthaul,  effects  of 

stringent    rule     on,     in 

Iowa,  59. 
rates  on,  58. 
Lumber  rates.  Northwestern, 

30. 

Madison,  James,  on  accumula- 
tion of  all  governmental 
power  in  the  same  hands, 
240. 

Maximum  rate  possible  to 
charge,  26. 

McPherson,  Logan  G.  ,on  trans- 
portation in  Europe,  pas- 
senger, 156. 
waterway,  188. 

Monopoly,  industrial,  45. 
railway,  44. 

Morris,  Ray,  "Railroad  Ad- 
ministration," 259,  261. 

Northwestern  lumber  rates, 
30. 

Operating  expenses  per  mile 
of  road  in  United  States 
and  foreign  countries, 
136. 

Operation,   differences   in   av- 
erage costs  of,  24,  54. 
regulation  of,  268. 


Packing-house  products,  dis- 
criminatory rates  on,  50. 


countries     and     United 
States,  84. 

Passenger  service,  in   United 
States    compared    with 
that    in    foreign    coun- 
tries, 155. 
safety  of,  128,  166. 
terminals  and,  154. 

Passengers,  accidents  to,  128, 
166. 
hauled,  per  dollar  of  capital 
in  United  States  and 
foreign  countries,  136. 
per  dollar  of  operating  ex- 
penses in  United  States 
and  foreign  countries, 
136. 

Physical  valuation,  as  a  basis 
for  fixing  rates,  81,  122. 

Pooling,  72. 
Emory  R.   Johnson  on,    73, 
74. 

Pratt,  Edwin  A.,  on  Ameri- 
can passenger  service, 
155. 

Profits,  valuation  and,  123. 

Prouty,  Charles  A. ,  on  conflict- 
ing duties  of  Interstate 
Commerce  Commission, 
243. 
on  regulation  of  railway 
capital,  225. 

Public  service  rendered,  per 
dollar  of  capital  in 
United  States  and 
foreign  countries,  136. 
per  dollar  of  operating  ex- 
penses, 136. 


287 


INDEX 


Railroad  Securities  Commis- 
sion, report  of,  122.  267. 
Ratemaking,  principles  of,  1, 
19. 
cost  of  service,  1. 
value  of  service,  19. 
Rates,  effect  of  unreasonably 
low,  53. 
freight,  in  United  States  and 
foreign     countries,     12, 
197. 
on     foreign     waterways, 
197. 
influence  of  bulk  on,  14. 
long-and-short  haul,  58. 
maximum  possible,  26. 
on  competitive  traffic,  9. 
on  copper,  64. 
on  corn  in  Illinois,  26. 
on  grain,  65. 

on  live-stock    and  packing- 
house products,  discrim- 
ination between,  50. 
on  low  grade  freight,  6. 
on  Northwestern  lumber,  30. 
passenger,    in    the     United 
States  and  foreign  coun- 
tries, 84. 
regulation  of,  251. 
similarity  of,  to  taxes,  33. 
Regulation,     for     increasing 
safety     of     transporta- 
tion, 270. 
government,  underlying 

principles,  246. 
who  shall  regulate?  222. 
of  finances,  258. 
of  operation.  268. 
of  rates,  251. 


Return,  limiting  railways  to  a 
maximum,  107. 

Ripley.  E.  P.,  on  "charging 
what  the  traffic  will 
bear,"  10. 

Ripley,  W.  Z. ,  on  rate- 
making,  26. 

Safety,  railway,  128,  166. 
Sanborn,    Judge     W.     H.,    on 
"fair  return,"  100. 
on  railway  valuation,  87,  91. 
on  state    interference    with 
interstate       commerce, 
231. 
Sault  Ste.    Marie  Canal,   cost 
of,  201. 
interest    on   investment  per 
ton     mile     of      freight 
carried,  202. 
Securities   Commission,  Rail- 
road, report  of,  122,  267. 
Sherman  Antitrust  Law,  73. 
State     railroad    commissions, 
A.  T.  Hadley  on  powers 
of,  234. 
personnel  of,  235. 
salaries  of  members  of,  238. 
Substitution    of    tonnage   at 

transit  points,  68. 
Suez  Canal,  cost  of,  201. 
Switzerland,  average  haul  per 
ton  of  freight  in,  134. 
capitalization  of  railways  in, 

112. 
freight  hauled  in,  per  dollar 
of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 


288 


INDEX 


Switzerland,      operating     ex- 
penses per  mile  of  road 
in,  136. 
passengers    hauled    in,   per 
dollar  of  capital,  136. 
per    dollar    of    operating 
expenses,  136. 
public  service   rendered   in, 
per  dollar  of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 

"Tap  Line"  railways,  allow- 
ance of  excessive  rate 
divisions  to,  67. 

Terminals,  passenger,  154. 

Transit  privilege,  abuse  of ,  68. 

Trespassers,  accidents  to,  167. 

United  Kingdom,  average 
haul  per  ton  of  freight 
in,  134. 

average  passenger  rate  in, 
84. 

capitalization  of  railways  in, 
112. 

freight  hauled  in,  per  dollar 
of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 

operating  expenses  per  mile 
of  road  in,  136. 

passengers     hauled   in,   per 
dollar  of  capital,  136. 
per  dollar  of  operating  ex- 
penses, 136. 

public  service  rendered  in, 
per  dollar  of  capital, 
136. 


United  Kingdom,  public  ser- 
vice rendered  in,  per 
dollar  of  operating  ex- 
penses, 136. 

Valuation  of  Railways,  de- 
cision regarding,  in  Min- 
nesota, by  United  States 
Circuit  Judge  Sanborn, 
87,  91. 

for  regulating  rates  and 
profits,  81.  123. 

Harrison,  Fairfax,  on,  117. 

peculiar  diflficulties  of,  116. 

views  of  Railroad  Securities 
Commission  on,  122. 
"Value  of  Service, "  in  railway 
ratemaking,  4,  19,  46. 

in  ratemaking  and  price- 
making  in  other  indus- 
tries, 19. 

Water   transportation,    costs 

of  rail  and,  181. 
Waterways,  as  auxiliary  facil- 
ities of   transportation, 
216. 
as    regulators    of     railway 

rates,  206. 
competition    of,    with    rail- 
ways, 206. 
cost  of,  in  France,  199. 
in  Germany,  199. 
of  Kaiser  Wilhelm  Canal, 

201. 
of  Manchester  Ship  Canal, 

201. 
of  Sault  Ste.  Marie  Canal, 
201. 


289 


INDEX 


Waterways,  cost   of,  of  Suez 
Canal,  201. 
per  mile,  200. 
density     of     traffic     on,    in 

Europe,  218. 
depth  of  American,  189. 
depth  of  European,  187. 


Waterways,     length    of,    and 

tonnage     on,      foreigm, 

185. 
rates  per   ton    per  mile  on 

foreign,  197. 
transoceanic,  competition  of, 

with  railways,  178. 


(2) 


This  book  is  DUE  on  the  last  date  stamped  below 


JAN  2  4  lyja 
WAR  19  1935 

DEC  3  0^PA9 


FormL-9-15m-ll,'27 


./ 


203 
D92a 


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HE 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


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